Raytheon Company (RTN) is set to report its third-quarter 2013 results before the market opens on Oct 24, 2013. Last quarter, the company posted a positive earnings surprise of 26.15%. Let’s see how things are shaping up prior to this announcement.
Factors to Consider This Quarter
Raytheon is a well-positioned large-cap defense player. The company is currently pursuing cost-containment measures and consolidates its business to offset the U.S. defense budget pressure. The company is identifying additional opportunities to save costs by streamlining product portfolio and reducing fixed costs. These initiatives will enable the company to improve its margins going forward.
In addition, Raytheon is progressing well on its numerous programs, the Standard Missile-3 (SM-3) missile interceptor, the Advanced Medium-Range Air to Air Missile, the SM-2 and SM-6 ship defense missiles, Javelin anti-tank missile, Rolling Airframe Missile, Small Diameter Bomb II and Tactical Tomahawk. Successful completion of these programs will enable it to get more orders in the future.
However, the defense industry continues to face challenges from the U.S. government’s defense budget cuts and political uncertainty. Despite receiving numerous small ticket size contracts during the quarter, the number of contracts and the size of the orders, awarded by the Department of Defense, have reduced due to the budget cuts.
In addition, high-cost programs and risks associated with key project executions and order cancellations due to budget cuts is also a major cause of concern. We believe all these factors will negatively impact Raytheon’s near-term performance.
Our proven model does not conclusively show that Raytheon is likely to beat earnings this quarter. That is because a stock needs to have both a positive Zacks Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. This is not the case here as you will see below.
Negative Zacks ESP: This is because the Most Accurate estimate stands at $1.32, while the Zacks Consensus Estimate is pegged at $1.33. This comes to a difference of - 0.75% ESP.
Zacks Rank #2 (Buy): Raytheon with Zacks Rank #2 (Buy), enhances the possibility of an earnings surprise. However, the Zacks Rank #2 when combined with a negative ESP makes surprise prediction difficult.
We also caution against stocks with Zacks Ranks #4 and 5 (Sell) going into the earnings announcement, especially when the company is experiencing a negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies from the sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Lockheed Martin Corporation (LMT), Earnings ESP of + 2.21% and Zacks Rank #1 (Strong Buy).
Northrop Grumman Corporation (NOC), Earnings ESP of + 2.21% and Zacks Rank #2 (Buy).
General Dynamics Corporation (GD), Earnings ESP of +1.80% and Zacks Rank #3 (Hold).