After more than a decade of above-average growth, spending trends in the defense industry have become much more challenging. Raytheon (NYSE:RTN) is highly dependent on the Pentagon for its sales, and its international business was just hit by the loss of contract in the United Kingdom. The longer-term outlook is still solid, given management's track record and a leadership position in the industry.
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Recent Sales Review
Raytheon announced second-quarter results in late July and logged a 2% sales decline to $6 billion on the loss of work for the U.K. Border Agency. It operates in six primary operating segments that provide a wide array of defense, intelligence, missile, network and aerospace systems. It also provides services for the products it sells. Each unit posted flattish sales, except for intelligence and information systems that lost the U.K. business.

Profit Trends and Outlook
The lost business also hit profits as operating income fell 55%, to $345 million. Higher other expenses pushed net income down 57.5% to $208 million, or 55 cents per diluted share.

For the full year, Raytheon management expects sales around $26 billion and earnings between $4.75-4.90 per share. Excluding the lost U.K. business and a pension adjustment, it expects earnings between $5.13-5.28 per share.

The Bottom Line
Raytheon ended the quarter with a business backlog of close to $36 billion, or more than one year of annual revenue. The funded backlog, which means a contract has been signed and the customer is obligated to pay, exceeded $22 billion. This provides ability to peer into the future and get a comfortable gauge on sales levels for the next year or so.

Despite the near-term hiccup in sales and profits, Raytheon is well-managed and should be able to leverage single-digit sales growth into double-digit profit growth, as it has been able to do over the past decade. Net debt was negative as of quarter end, meaning the balance sheet held more cash than long-term debt.

The stock is also very reasonably valued. The forward P/E ratio is below 10, which is well below the historical multiple average in the mid-teens and also below pure-play peers that include Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT) and certain divisions of Boeing (NYSE:BA) and United Technologies (NYSE:UTX). Throw in a current dividend yield of 3.3%, and there are a number of positive aspects to becoming a shareholder in Raytheon. (For more, see A Big Military Budget's Big Winners Aren't Big Names.)

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Tickers in this Article: RTN, LMT, UTX, BA, NOC

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