Recommendation: Cautious Buy
In the wake of the declining U.S. military budget, the billion-dollar question is how defense contractors will cope with the squeeze. So, let’s take a look at Raytheon (NYSE:RTN), which recently landed a $497 million contract from the Air Force and a $95.1 million contract from the UK Ministry of Defence.
Based in Waltham, Massachusetts, Raytheon is a major American defense contractor who specializes in weapons and military electronics. Throughout the company’s 90-year history, Raytheon has served a wide base of public and private clients, oftentimes in conjunction with some of its biggest competitors, including Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC). The company employs over 71,000 worldwide and brought in $25 billion in sales last year.
In the Aerospace and Defense industry, Raytheon is one of the larger players. Out of the 63 companies in the industry, Raytheon has the 21st largest market cap. The company does well in terms of its long-term growth rate and Price/Earnings to Growth ratio, which are both ranked tenth in the industry.
In addition, the company’s 3.8% annual dividend yield is second best in the industry. However, the company is middle-of-the-road in terms of most other fundamental metrics. Raytheon’s return on equity is 25th in the industry, earnings growth weighs in at 33rd and sales growth is 35th. As mentioned earlier, Raytheon’s main competitors are Boeing, Lockheed Martin and Northrop Grumman. Of those, Raytheon has the slowest sales growth but the second highest gross margin and operating margin.
Raytheon’s next earnings announcement is scheduled for April 26, before the opening bell. As it stands, analysts aren’t overly optimistic about this company, forecasting a 4.8% dip in sales year-over-year as well as just 9.4% earnings growth. By comparison, the rest of the Aerospace and Defense industry is headed towards 18% earnings growth. Over the past three months, analysts have revised their earnings estimates downward by 4%.
Nonetheless, Raytheon has a history of modest earnings surprises; the company has surpassed earnings estimates by at least 6% for the past three quarters. So, in a few weeks, we’ll see whether analysts are being overly conservative or if Raytheon’s top line really is shrinking.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This stock has made significant gains over the past twelve months; this time last year, RTN was a D-rated stock. Most notably, buying pressure has firmed up for this stock, so RTN earns a B for its Quantitative Grade. On the fundamental front, though, this company still has room for improvement. Raytheon is still struggling in terms of sales growth and analyst earnings revisions, and its earnings and operating margin growth are lackluster. Raytheon is doing well in terms of cash flow, return on equity and earnings surprises. This is a B-rated stock overall.
RTN is a B-rated buy, but a dip in buying pressure could send this stock down into hold territory. This is a cautious buy.
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