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Syria: Tomahawks may fly, but Raytheon shares not soaring

A Tomahawk missile
Source: US Navy | Wikipedia
A Tomahawk missile

Defense experts don't agree on much when it comes to military action against Syria, but they all seem to believe that any strike would involve Tomahawk cruise missiles, made by Raytheon . So why are Raytheon shares lagging the other defense contractors?

"Raytheon's Tomahawk cruise missile is said to be President Barack Obama's weapon of choice," reports Zacks Equity Research. The missiles cost an estimated $1.1 million each. The Pentagon increased orders for the ship- and submarine-launched missiles after firing an estimated 124 Tomahawks during the Libyan conflict.

"One submarine fired more than 90 missiles at a variety of targets," Raytheon reported.

As talk of Syria heated up, Raytheon shares hit an intraday 52-week high of $77.93 two weeks ago, on Aug. 26.

Then shares fell. As of midday Monday, the stock is down nearly 3 percent from its high, though it is having its first up day in three sessions.

Meanwhile, as Raytheon began losing altitude, the S&P 500 gained a little more than half a percentage point. Moreover, defense industry peers like Boeing, Honeywell, United Technologies, Textron and General Dynamics have outperformed the broader market, while Lockheed Martin stayed flat, and Northrop Grumman declined only slightly.

"I think it's within the randomness of the market," said Howard Rubel at Jefferies, who has a buy rating on Raytheon because of its potential international growth. A Syrian strike is already partially priced into defense stocks, he said.

Looking at the big picture, however, talk of an attack highlights the contradiction between what the Obama administration wants to do militarily and what sequestration has done to the defense budget, Rubel said.

"Maybe it will bring to a head some of the issues associated with the budget," he said.

So far, however, sequestration has not had much effect on defense earnings.

"The Pentagon has found a lot of the loose change in the change jar," Rubel said. "Fiscal year 2014 is going to be a little tougher."

Some believe that to win support for an action against Syria, the president will have to suspend or reduce sequestration. That would benefit all defense companies, especially Lockheed Martin, which is fighting to maintain support for the F-35 fighter jet and its Littoral Combat Ship.

Rep. Buck McKeon, the Republican head of the House Armed Services Committee, told CNBC's Larry Kudlow that in exchange for agreeing with the Obama on Syria, "I want to see sequestration stopped. I want to see these harmful cuts to the military stopped when we're asking them to do more."

In the meantime, the pullback in Raytheon shares may be randomness in the market or a sign that investors doubt that a strike is imminent.

"If you look at the polls, the president has to make a very compelling speech," Rubel said. "What are the consequences of whacking the hornet's nest?"

The Navy awarded Raytheon a $338 million missile contract in June 2012 and another $225 million six months later. In the second quarter, Raytheon reported a $32 million gain in Tomahawk sales year over year.

—By CNBC's Jane Wells. Follow her on Twitter: @janewells.

Defense Contractors