Question

Come up with an extensive Porters Five Forces analysis on the company Raytheon, which is a defense contractor company.

And also an analysis on their MOAT!

Based on the stock analysis of this company!

Answer 1

Raytheon’s five forces:

• Threat of new entrants: the new entrants in the defense industry can help Raytheon in bringing innovation. Pressures can be put on the company by reducing costs, adopting lower prices for its products and by granting new propositions to the customers. Hence the company must meet all the challenges and take the required steps to safeguard its competency.

It can manage the threat by:

1. By bringing innovation in its products and services.
2. By spending money on research and development activities.
3. By building economies of scale t lower the fixed costs.

• Bargaining power of suppliers: there will be many suppliers in the industry. Those who are in dominating position will capture the market in which case Raytheon will lose its share. The suppliers will negotiate to fix higher prices and the overall result is suppliers with bargaining power will lower the profitability for the defense industry.

It can manage the threats by:

1. Having business with dedicated suppliers.
2. Building supply chain with suppliers.

• Bargaining power of buyers: buyers would usually like to buy products by spending minimum. This will be a challenge for Raytheon Company’s profitability. The stronger the customers are the more will be their bargaining power and hence Raytheon has to go in for more discounts and offers.

It can manage the threats by:

1. By going for innovation on its products.
2. By constructing a strong base of its customers.

• Threat of substitutes: Substitute’s will also meet the customer needs. We can consider the example of dropox, Google search etc. as a substitute for hardware drives. The threat of substitutes will provide value proposition that is different from one that is offered by the industry.

It can manage the threats by:

1. The company has to be service oriented.
2. By increasing the switching cots to the customers.
3. The company has to understand the needs of its customers.

• Rivalry among competitors: Raytheon Company operates in a competitive industry. When there are more competitors, the company has to reduce the price on its product which in turn will reduce its profitability.

It can manage the threats by:

1. The company can build business with the competitors to increase the market share.
2. By adopting differentiation on its products.
3. By constructing scale to compete better.

Raytheon’s MOAT analysis:

Raytheon’s MOAT depends on its competitive advantage, pricing power and capital intensity.

1. Competitive advantage: Raytheon’s competitive advantage is that it invests on new technologies that go beyond its missile business. The demand for Raytheon’s technology continues to increase as a result of which the investors get attracted by the company which remains a strong asset in their portfolio.
2. Pricing power: being experienced in missile business, it develops missile that is cost effective. It has system that can fire many missiles faster which is also very cheaper because it uses one launcher with two missiles.

Raytheon’s stock analysis:

Raytheon’s stock analysis is made on the following basis considering whether it is worth buying company’s stocks.

Raytheon’s stock is not worth trading now. The company’s P/E is 30. But the broader market P/e is restricted to 21. This means the company’s stock is expensive to buy. He next is price to sales ratio. Where in Raytheon it is 2.45, whereas broad ratio is 2.1. The next one to be considered is price to cash flow ratio. In this case, the PC ratio is 22.6 whereas broader market ratio is only 13.75. Hence the PC ratio makes the company’s stock to be expensive.