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The Best Play on Defense

Tuesday, 31 Jul 2007 | 7:56 PM ET

The best defense stock investors could buy right now is Raytheon, Cramer said.

Defense is Cramer’s seventh wild bull market, and the best stocks in the sector have to fit two criteria: They have to be cheap on earnings, and they have to be an almost pure play on defense.

Call To Arms
Playing "defense," with Mad Money host Jim Cramer

Raytheon tops both categories. Ninety-six percent of its business comes from defense, and it trades at 15 times earnings, making it the cheapest of the defense contractors, Cramer said.

The company is coming off a good month and quarter after landing two of the three major contracts for which it was bidding. When Raytheon reported earnings, it also raised its full-year guidance by 20 cents.

Cramer called Raytheon’s balance sheet beautiful. The $2.5 billion earned from selling its Aircraft Systems business will be used to retire debt and buyback shares. In fact, Raytheon’s buyback strategy seems intent on keeping the share price no lower than $54. and Cramer is confident the company’s second-half cash flow – around $2 billion – will be put to good use for shareholders.

Another great point about Raytheon is that it’s ROWer, or a company with exposure to markets in the rest of the world. Cramer called it the best among U.S. defense companies. Foreign sales make up about 18% to 25% of Raytheon’s revenues.

“Biggest ROWer, most exposure to defense and the cheapest one. Bottom line: We’ve got a new bull market happening here quietly in defense,” Cramer said, “and Raytheon is the best way to play it.”

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