Raytheon: shooting for growth

Sin stocks mock the virtuous by outperforming the market over time. One subset of sin doing particularly well recently: weapons merchants (or, if you prefer, defence contractors). The shares of the biggest - Lockheed Martin, General Dynamics, Northrop Grumman, Raytheon - have all doubled the return on the S&P 500 over the past two years, and have whipped that index over a decade, too.

The recent outperformance is particularly surprising, because limp US military spending has reduced average sales growth at the big contractors to roughly zero in the past few years. The big four contractors, in particular Lockheed, have all responded to the stagnant revenues by buying back more shares. But this will not be enough to maintain the shares' strong performance.

Instead, Raytheon is trying cyber security. It is the largest missile maker in the world; its revenues have fallen every year since 2010. But the missile business is not bouncing back soon: Raytheon is targeting 2015 sales of $22.6bn, 10 per cent below 2010 levels.

The company has made more than a dozen cyber security acquisitions since 2007. The most recent is the purchase of a majority stake in Websense for $1.7bn. The deal will quadruple the revenues of Raytheon's Cyber segment, to $500m. Part of the appeal is the chance to diversify away from government contracts. Websense provides private customers email security and data loss prevention services. Raytheon plans to grow Websense's sales by incorporating its defence-grade offerings into the services offered to the private sector.

Raytheon's enlarged cyber products division will account for just 2 per cent of revenues. Still, Barclays estimates the cyber division could contribute 40 basis points of earnings per share growth, which is enough to matter. The issue is cost: the deal valued Websense of six times revenues. When growth comes at that price, profitable stagnation looks appealing.

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