Raytheon (NYSE:RTN) is the exception to the rule among large defense companies, a company focused on electronics, sensors, precision weapons, and cyber instead of large flagship properties like bombers, tanks, or warships. In terms of revenue it is also the smallest of the "big four," a group that also includes Lockheed Martin, General Dynamics, and Northrop Grumman.

But with the world becoming ever more digital, there is value in supplying the brains to these large systems. Raytheon's EBITDA margin over the past year has trailed only Northrop Grumman, an indication that the company is well exposed to the more profitable parts of the defense business.

Raytheon surprised the industry in June when it announced plans to combine with the aerospace arm of United Technologies (NYSE:UTX), a deal that would rank as the most significant defense merger in more than two decades and create a $74 billion aerospace and defense powerhouse.

Is Raytheon a good buy as it heads toward the United Technologies combination? Here's a deep dive into the business to determine if it is worth buying today.

Explosive growth

Raytheon organizes its operations around missiles, intelligence, radar and missile defense, and space. The company is perhaps best known for its MIM-104 Patriot surface-to-air missile defense system, but it also makes a range of other precision munitions going by names including Tomahawk, Sidewinder, and Maverick, as well as the radar and electronics that power Lockheed Martin's THAAD ballistic missile interceptor and other complex systems.

A Patriot Missile system launching.

A Raytheon Patriot missile battery in action. Image source: Raytheon.

The portfolio gives Raytheon exposure to a wide range of platforms made by other contractors, as well as a leading seat at the table as the government contemplates spending hundreds of billions to refresh its missile and missile-defense capabilities.

Raytheon is also the most diverse U.S. prime contractor in terms of international sales, with foreign customers accounting for about one-third of total revenue and closing in on half of its backlog. While foreign countries sometimes struggle to gain access to U.S. defense platforms like fighters and warships, Raytheon has found a wide and growing audience across the Middle East and Europe for its missile defense systems.

The recent attacks on Saudi Arabia oil facilities should only increase demand for Raytheon products in the region, as the Saudis and other U.S. allies contemplate investing in protecting commercial infrastructure in addition to potential government and defense targets.

Raytheon's most recent quarterly results in July were strong, with the company posting earnings of $2.92 per share, beating consensus estimates by $0.28, thanks to both stronger-than-expected operational results and a lower tax rate. Raytheon's book-to-bill topped 1x across all segments, and the company raised its 2019 full-year bookings target by $1.5 billion to between $31 billion and $32 billion, setting up strong revenue growth into 2020 and beyond.

Hypersonic potential

Raytheon is also well positioned to benefit from the Pentagon's new emphasis on hypersonics, weapons and interceptors able to travel at least five times the speed of sound. Defense planners have identified hypersonics as a priority due to fears that potential rivals Russia and China are peers, or even slightly ahead of the U.S., in their development.

To date Lockheed Martin has been the overwhelming leader in hypersonics, winning $3.5 billion in contracts over the past year and taking a lead position on all four of the major programs that have been announced. However, it's still early days for hypersonic development, and the Pentagon has made it clear it wants vigorous competition in the supply chain.

A chart comparing subsonic, supersonic, and hypersonic missiles.

A look at how Raytheon categorizes missiles. Image source: Raytheon.

Raytheon, with its existing expertise in missiles and its massive R&D effort in the area, appears to be a natural rival to Lockheed. The Pentagon fiscal 2020 budget requested $2.6 billion for hypersonic research, and the department figures to spend billions more in the years that follow. Expect the military to use some of that funding to hedge its bets and invest in contractors other than Lockheed Martin.

This is also one of the few areas where Raytheon and United Technologies capabilities overlap. UTX owns aerospace engine maker Pratt & Whitney, which has decades of experience in topics like managing heat and exhaust that are key issues in the development of hypersonics.

So is Raytheon a buy?

Raytheon is a well-managed company with a strong portfolio of businesses and a solid growth outlook. However, the company's shares today are at least somewhat tied to shares of United Technologies ahead of the all-stock merger.

Fortunately, for now at least UTX is doing well, led by the strong aerospace business that will eventually join with Raytheon but also helped by improvements with its Otis elevator and Carrier HVAC units. United Technologies is going to split those businesses off from its aerospace arm prior to combining with Raytheon, meaning Raytheon shares could be stuck in deal-related limbo well into 2020.

Raytheon is not cheap, trading at 18.5 times earnings, in line with most large defense contractors and at a premium to General Dynamics. Its dividend yield, at 1.8%, trails the more generous payouts offered by Lockheed Martin and GD.

Defense metrics data by YCharts

You could make a case for buying Raytheon today because it is a strong enough company on its own, and the UTX combination has enough promise, to justify buying and holding until the deal is complete. But given that there are other attractive opportunities in the defense sector, I'd rather wait on the sidelines through the merger process and initial integration instead of jumping on board right now.

Right now, I like Raytheon the company better than I like Raytheon the stock.