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Psst! Want to Own a Piece of Israel's Iron Dome?

By Rich Smith – Dec 3, 2012 at 9:10PM

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Raytheon stock may be just the thing for you.

Over the course of a single harrowing week, between Nov. 14 and Nov. 21, 2012, military forces under the control of Hamas in Gaza lobbed more than 1,500 missiles at Israel. Two-thirds of these missiles, launched into areas with little or no population, were ignored.

As for the remaining 500 or so missiles that did pose a threat to population centers, Israel unleashed a new missile defense system on them called "Iron Dome." It destroyed 85%  of the missiles it targeted.

To put this in perspective, during the 1991 Gulf War, the U.S. deployed batteries of Patriot missile defense systems to Israel to shoot down Iraqi Scuds. The Patriot's manufacturer, Raytheon (RTN) claims Patriot succeeded in hitting 40%  of the Scuds it targeted. (Our own Government Accountability Office puts the figure for "overall effectiveness" at closer to 9%.) Depending on which number you believe, therefore, it appears that Israel's new system is anywhere from twice to 10 times as effective as the Patriot systems of 20 years ago.

How do we get a piece of that?
The implications are obvious. For now, Patriot is still selling well. Raytheon, which is now making Patriots in cooperation with Lockheed Martin (LMT 0.07%), just landed a deal to sell an upgraded version of the system to Turkey. But Israel has a literal "killer app" in Iron Dome. When it comes to missile defense, it's clearly best of breed -- and squarely in the sights of U.S. defense contractors, who'd love to be able to sell it to their customers.

They may get the chance.

Israel's RAFAEL developed Iron Dome's radar, battle management system, communications, and interceptor missile. But RAFAEL didn't do it all on its own. In fact, over the four years it took to develop the system, the U.S. spent nearly $900 million  to help develop the weapons system. Most recently, it provided $205 million in funding to help Israel spool up a fifth Iron Dome battery, just in time for it to be put into action during the Gaza action.

Considering how well this investment is paying off, the U.S. Congress  recently moved to "ensure the United States has appropriate rights to this technology." In exchange for a commitment to help Israel build and pay for additional Iron Dome batteries, Congress convinced RAFAEL to take on Raytheon as its U.S. partner, to assist with marketing Iron Dome in the U.S. 

And it gets better. As part of the same agreement that gave Raytheon an "in" on Iron Dome, the company also got to team up with RAFAEL on the Israeli company's latest anti-missile project, called "David's Sling ," an even more robust system designed to target medium-range missiles launched from farther away than Iron Dome can tackle.

Good, better, best
Iron Dome was designed to target rockets and other missiles launched from under 45 miles away. David's Sling targets objects as far out as 200 miles. And RAFAEL also has an even longer-range deterrent called the "Arrow" system (manufactured in cooperation  with Boeing (BA 4.65%)), which aims to protect Israel from ballistic missiles originating in Iran.

Longer term, multiple defense companies are working on the holy grail of missile defense, a laser-based system, that will obviate the need to try and "hit a bullet with another bullet." (Lockheed, Boeing (BA 4.65%), and Northrop Grumman (NOC 2.01%) each have laser-based systems in the works.) But for now, the Israeli products appear to be the best ones out there for missile-on-missile defense.

What's it mean to you?
Among publicly traded companies, Raytheon, as the U.S. defense contactor most closely tied to RAFAEL and its highest-profile missile defense system, has the pole position to profit from this Israeli technology. Conveniently, Raytheon is also one of the cheapest defense stocks out there today.

With few analysts expecting it to post fast-pace growth in the near future (long-term growth estimates hover around 8%), Raytheon carries a most enticing P/E ratio of less than 10. Adding to the stock's attraction, Raytheon boasts a dividend yield of 3.5%. And with only 31% of its profits earmarked for dividends, the dividend looks about as safe as can reasonably be expected in a fiscal-cliff environment.

Rounding out the list of financial metrics, free cash flow at the firm is strong -- about 98.9% of reported net income -- and debt levels are low, at less than $1 billion, net of cash on hand.

In sum, with strong value characteristics and a popular product to sell, Raytheon looks like a fine defensive play for your investing dollars. Maybe not "rock solid," but definitely "iron strong."

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin, Northrop Grumman, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

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