) to sell from buy, and cut the $35 price target to $25.
Analyst Nick Fothergill says he downgraded the defense sector to neutral from buy, based on the federal budget outlook. He says Iraq supplementals and a rising U.S. fiscal deficit have started to place increasing pressure on the outlook for the defense budget. As growth in U.S. defense spending starts to slow, he expects U.S. defense companies to see GAAP earnings per share multiples move back towards their average 10-year multiple of 15.2.
Fothergill says another concern with Raytheon is that its Network Centric Systems segment (18% of 2002 EBIT) is at risk of seeing further cost over-runs on its 10 problem programs.