This Stock Has Built-in Upside

In fiscal year 2015, the federal budget is $3.8 trillion.

When you look at a number like that, a $133 million award sounds insignificant.

But the focus of that spending – on advanced cybersecurity – is very meaningful to tech investors like you.

On Sept. 1, Uncle Sam issued this “identity theft insurance” contract to privately held ID Experts. It did so to protect the 21.5 million Americans whose personal information was stolen as part of a 2014-15 cybertheft at the U.S. Office of Personnel Management.

[ad#Google Adsense 336×280-IA]It’s all part of a massive push – $14 billion in fiscal 2016 alone – by the nation’s leaders to thwart cyber intrusions at federal agencies and other critical places like banks and brokerages.

Of course, not all of these contracts are going to privately held firms or small and risky cybersecurity specialists.

Today I want to show you how to profit from a defense tech leader that recently opened up a new line in federal cybersecurity – a business that’ll be growing at a hefty, steady pace between now and at least 2020.

Most investors don’t even realize it’s a huge player here…

Billions and Billions

Cybersecurity will remain a growth field for years to come. Just look at the headlines.

Hardly a day goes by without a cyberattack on a government agency, corporation, bank, retailer, or university.

According to a report from Market Research Media, the federal government will spend $65.5 billion on cybersecurity between 2015 and 2020. And the pace of that spending will grow steadily at about a 6.2% compound annual growth rate (CAGR).

Take the hack of the UCLA Health System. In mid-July, hackers exposed the healthcare data of roughly 4.5 million patients.

On March 14, the U.S. State Department said Russian hackers breached its computer network and the agency had to shut it down to remove malicious software. Two weeks later, the state of Indiana had its website hacked and taken down.

That’s minor compared with the Feb. 5 news that as many as 80 million customers of Anthem Inc. (NYSE: ANTM), the nation’s second-largest health insurance company, may have had their account information stolen. That Anthem data includes employment and income histories, addresses, and Social Security numbers.

A 2014 survey by the Ponemon Institute showed that the average cost of cybercrime for U.S. retailers more than doubled from the year before to an annual average of $8.6 million per company.

Hacks on other sectors proved even more expensive, the Ponemon survey showed. The annual average cost per cyberattack came in at $20.8 million in financial services, $14.5 million in the technology sector, and $12.7 million in communications industry.

No wonder the researchers at MarketsandMarkets say cybersecurity is a global $60 billion industry. The forecasters there expect that number to double just in the next four years alone.

Given the sensitive nature of the data it holds on its computers, the U.S. government spends heavily on cybersecurity. The fiscal 2016 budget that begins Oct. 1 includes $14 billion in spending.

Roughly $5.5 billion of that will protect the Pentagon’s computers alone.

In the words, cybersecurity clearly meets the mandates of Rule No. 3 of my five-part system for building wealth with tech: Ride the unstoppable trends.

That’s why I think tech investors should look at this cybersecurity investment…

A Truly Unstoppable Trend

Based in Waltham, Mass., Raytheon Co. (NYSE: RTN) is well known as one of the nation’s top defense contractors. But over the last few years, Raytheon has quietly beefed up its cyber division to protect government agencies and other large organizations.

In that regard, Raytheon ranks as a “stealth” cyber play.

This is a natural business line for the nation’s fourth-largest defense contractor. Every agency within the Pentagon needs cyber safeguards, and the equipment Raytheon sells, such as radar and missile-control systems, must have such cyber defenses built in.

Raytheon made a huge leap forward in April when it bought Websense Inc. for $1.7 billion, creating Raytheon/Websense, a new cybersecurity unit focused on commercial clients such as banks and retailers.

The move instantly diversified the company’s cyber operations beyond the federal realm. Websense counts some 21,000 commercial clients, about half of whom are overseas, and it consistently ranks in the top 10 firms providing “gateways” to protect against web intrusions and data loss protection.

Plus, Raytheon isn’t going it alone. Vista Partners LLC, the company that owned Websense, retains a 20% interest in the new unit.

Under the deal, Raytheon is investing $965 million in cash, providing a $600 million loan, and contributing $400 million of existing cyber assets. In turn, it expects the cyber business to bring in $500 million in sales in its first year of operations, with 20% profit margins.

When Going Private Makes Sense

Industry analysts say other large defense firms have struggled to sell their cybersecurity wares outside normal Pentagon channels. So, Raytheon forming a unit focused solely on business clients strikes me as a savvy move.

More to the point, it’s part of Raytheon’s long-term strategic plan. Company leaders decided back in 2007 to invest in cybersecurity as a growth business and have made some 14 acquisitions in this area since then.

For instance, Raytheon acquired surveillance and cybersecurity company Blackbird Technologies for $420 million in November 2014. Blackbird counts customers at the Department of Defense and in the intelligence community.

Much of Raytheon’s civilian cybersecurity operations will be housed in the company’s Intelligence, Information and Services division. In this year’s second quarter, the unit accounted for roughly 25% of Raytheon’s $5.8 billion in sales, up 3% from the year-ago period.

Plus, Raytheon ranks as a “twofer” investment. We get both its new cybersecurity business and the company’s full defense capabilities.

And those are wide-ranging. Raytheon ranks as a leader in missile defense, radar, surveillance, electronic warfare, and precision weapons. It also provides advanced sensors, avionics, data analytics, and drones.

The stock trades at $107.48, giving it a nearly $32.49 billion market cap. It has 13% operating margins and a 19% return on equity.

And the stock has built-in upside. It trades at less than 15 times forward earnings, a roughly 15% discount from the Standard & Poor’s 500 Index.

Over the past three months, the stock is up nearly 7.1%, compared with the S&P 500’s 5.1% decline. Not counting Raytheon’s 2.8% dividend, the stock has a two-year return of roughly 38%, more than double the broader market’s 18% return.

In other words, Raytheon joins Ultimate Software Group Inc. (Nasdaq: ULTI) and the three companies I recently shared with you as “comeback” plays – the investments we’ll use to “whipsaw” this correction right back in your favor.

Raytheon will help protect the value of your portfolio at the same time it’s protecting our nation’s cybersecurity – and, increasingly, our banks and retailers as well.

— Michael A. Robinson

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Source: Money Morning