On Jul 7, 2014, we issued an updated research report on the defense contractor Raytheon Co. (RTN). For the last four quarters the company posted higher-than-expected earnings with an average surprise of approximately 15.74%.
Raytheon is one of the largest aerospace and defense companies in the U.S. with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.
Although the tepid budget scenario seems to have put the lid on big awards in a sluggish defense industry, this defense major has been able to clinch quite a few modest deals lately. Particularly, cyber-oriented work is expected to yield solid growth. The fiscal 2015 budget has put considerable emphasis on cyber programs. To that end, the majority of acquisitions made by Raytheon in recent times have been in the cyber field. The company plans to increase its focus on new M&A exploring the commercial prospects of cyber.
Foreign military contracts continue to be the vital growth driver for Raytheon. International sales are expected to contribute 30% of projected 2014 sales or up mid single digits. Despite a weak defense budget and the uncertainties surrounding the Tomahawk missile, international bookings made up 39% of total bookings in the first quarter. International currently comprises 39% of Raytheon’s total backlog as well.
Raytheon’s under-leveraged balance sheet provides financial flexibility in matters of incremental dividend, ongoing share repurchases and earnings accretive acquisitions. The company posted strong operating cash flow growth of 56.2% to touch $659.0 million in the first quarter.
On the flipside, a large percentage of Raytheon’s business is generated from the U.S. Department of Defense and the tepid recovery in the U.S. economy has resulted in cutbacks in defense budgets. Indeed, one of Raytheon’s multi-billion dollar programs, the next-generation Joint Air to Ground Missile, has only received funding of $15 million for fiscal 2014.
The company experienced soft orders in the first quarter with its total and funded backlogs declining by 4.1% and 1%, respectively. Orders need to accelerate for RTN to close in on its 2014 target of 1.00-1.05x.
Raytheon currently holds a Zacks Rank #2 (Buy). Other favorably ranked stocks include Embraer S.A. (ERJ), Northrop Grumman Corp. (NOC) and Lockheed Martin Corp. (LMT), all carrying a Zacks Rank #2 (Buy).