Defense stocks were on the move Monday after Raytheon and United Technologies agreed to merge.
A combined company would generate $74 billion in annual sales, making it the second-largest aerospace and defense company in the U.S.
While President Donald Trump expressed concern a deal could make the industry less competitive, Raytheon CEO Tom Kennedy tells CNBC the two companies are more like partners than competitors.
"We're complementary. We're not competitive," said Kennedy. "They have some complementary technologies, we bring together with our technologies to go to the marketplace. In this case here, we're going to be able to take about $8 billion of research and development spend and our 60,000 engineers to develop the next-level technologies to create the next generation franchises so we can go to the international/global marketplace and win those markets and then bring that stuff back to the U.S. to create more jobs."
Sheila Kahyaoglu, aerospace and defense analyst at Jefferies, says companies in the industry see mergers as the best way forward.
"It reminds us a lot of Harris and L3. You have to keep moving to get ahead. If you think about the budget, it's $730 billion so not an Uber-sized addressable market … it's still off of a very low base, so we have a good addressable market. It's just these companies are seeing a way of merging, and bigger is better, and defense seems to be the theme."
Ron Epstein, research analyst at Bank of America, sees a formidable player in the industry once the merger goes through.
"The underlying point of this transaction is a couple things. One, for United Technologies, basically they're swapping out Otis elevator and Carrier air conditioner for Raytheon. And no offense to Otis and Carrier, but Raytheon is a far superior asset. So with the spinout of those companies from UTC, Mr. Hayes has rebuilt this portfolio to a technology juggernaut. The combination here ... a defensive, high-tech portfolio, it really is a spectacular combination."
Tim Lesko, principal at Granite Investment Advisors, says sell-offs have presented buying opportunities for companies and investors.
"For a long time, it's felt like the defense stocks have been a little bit overvalued. We have owned Boeing and United Technologies for a long time and we've long looked at things like Raytheon but they were trading at premiums to the market. These last two downturns, both in the fourth quarter of last year and again in the second quarter of this year, have probably created some buying opportunities in stocks that otherwise were trading at valuations that we found a little bit high. So in a way getting Raytheon as a part of United Technologies is a bit of a win for a value-based manager like us because we're not paying a significant premium for it."
