Raytheon (NYSE:RTN) is Massachusetts’ biggest employer and a leading defense contractor most famous for its Patriot Air and Missile Defense System that destroyed so-called scud missiles during the Gulf War. Raytheon is a prime defense contractor for government customers that provides “electronics, mission systems integration and other capabilities in the areas of sensing, effects and command, control, communications and intelligence systems (C3I).”

While things are looking fine on Raytheon’s profit front for the rest of the year, revenues are weakening. Specifically, Raytheon lowered its full-year sales by $1.5 billion to a range between $25.5 billion and $25.9 billion. However, Raytheon’s profit forecast remained unchanged at an EPS range between $5.50 and $5.65.

The question for investors is that if Raytheon sales shrink, why should they invest in the stock? Here are four reasons to consider it:

• Great earnings reports. Raytheon has been able to meet or surpass analysts’ expectations at a pretty consistent rate and has done so in all of its past five earnings reports. In its report on Thursday, Raytheon beat analysts’ expectations of $1.16 per share by 6% — reporting earnings of $1.23 per share on revenue of $752 million.
• Low valuation. Raytheon’s price-to-earnings-to-growth ratio of 0.6 (where a PEG of 1.0 is considered fairly priced) means it is pretty cheaply priced. It currently has a P/E of 8.4 and is expected to grow about 14% to $5.56 in 2012.
• Large dividends. Raytheon’s annual dividend of $1.72 per share, which gives a yield of 3.85%, is big and is a good incentive to hold onto the stock in the long run, especially if you like dividends.
• Out-earned its capital cost. Raytheon is earning more than its cost of capital — and it’s improving. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Raytheon’s EVA momentum was 1%, based on first six months’ 2010 annualized revenue of $24.1 billion, and EVA that improved from negative $207 million annualizing the first six months of 2010 to $97 million annualizing the first six months of 2011, using a 9% weighted average cost of capital.

Here’s a reason to pause in thinking about a Raytheon investment:

• Modest growth with debt-laden balance sheet and shrinking cash. Raytheon has been growing modestly with decent profit margins. Its $25.2 billion in revenues have climbed at an average rate of 6.4% over the past five years, and its net income of $1.8 billion has gone up at an even faster average rate of 10.7% during the period, representing a 7% net margin. Its debt grew at a 2.2% annual rate, from $3.3 billion (2006) to $3.6 billion (2010), while its cash shrank at a 7.3% annual rate, from $5 billion (2006) to $3.7 billion (2010).

Raytheon stock is a bit risky if its revenues decline — particularly if the proposed debt-ceiling deal results in cuts to the defense budget. On the other hand, its low valuation and high dividend seem to provide some insurance against that risk.

Peter Cohan has no financial interest in the securities mentioned.