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No. of Recommendations: 1
I recently became an employee of Ratheon and I thought it would be a good idea to research the company who will be paying me for the next few years. Here is what I have learned so far (from reading annual reports, quarterly reports and company newsletters):

1) Raytheon recently aquired parts of Hughes Aircraft and Texas Instruments that do government contract work and electronics. At about the same time, Raytheon sold off its Amana consumer appliances section. Overall the result of these manuvers is to refocus the company on what it does well (Government contracts, electronics, engineering and business aircraft) and unfocus (defocus?) from the things it does poorly (consumer goods). From an operations and management perspective, this is a good sign for future growth in earnings (and stock price).

2) The downside of point number 1 is that Hughes especially had a large debt that Raytheon has assumed and Raytheon itself had to borrow money to pay for its ongoning reorginization. When combined with the nature of its business in which customers pay award fees (i.e., profits) only once a quarter after the work is done, Raytheon has serious cash flow issues. For Raytheon, this is particularly troublesome because its largest potential growth direction is to foriegn countries. Since these contracts are especially expensive to get started (imagine relocation expenses alone!), Raytheon must pick and choose the contracts it persues.

Between these two points, you have the main arguements for and against this company. In the short term, I think that the debt issue is a good enough reason to stay out of Raytheon stock if you don't have it. For those of us who already have stock or are getting a matching contribution for our Raytheon 401k plans, we should probably be looking around for better investments (like the Rule Maker portfolio) that have a better chance of beating the S&P.

Unfortunetly for me, I have to keep my Raytheon stock for at least five years because it was the company's matching contribution to my 401k. For those of us who are stuck with part ownership for a while, I present some speculative comments about how Raytheon could become a truly great investment within five to ten years. (These comments should be taken with a grain of salt because they are based on the idea that if you can't change something, you should at least be optimistic about it.)

3) Raytheon's new CEO, Dan Burnham, is well respected in the industry as a man who can lead companies to success. He recently instituted a "Six-Sigma" program that should increase the quality of Raytheon's products from aircraft to software support. He also seems to understand the cash-flow problem and is comitted to solving it as quickly as possible. (I recently attended a meeting in which a company financial person recommended employees to get company American Expess Cards for business travel so that Raytheon can delay paying travel expenses intrest free.) The latest quarterly report seems to show improvements in this area.

4) Raytheon is quickly becoming the only company that has the size and expertese to bid for certain large government contracts. If it is successful overseas (and there is good reason to think that it will be), it could be a truly dominant force in international technological development. Stockholders should be cheered by developments such as Raytheon's recent contract to build air-traffic control systems for Chineese airports.

5) Defence spending, especially in politically popular cruise missile and missile defense systems (guess who makes the Tomahawk, Patriot and a host of other missle systems), is likely to grow over the next 5-10 years. Raytheon has also proven that it can convert military technology such as radars, sonars and C3I (command, control, communications and information) into commercialy useful products such as microwaves, fishfinders and air-traffic control systems. If private companies are able to succesfully exploit outer space for a profit in the next 10-20 years, I expect that Raytheon will be an important supplier of technical survices and products that will make it happen.

Jon Ericson
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