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In Defense Of Raytheon's Lagging Growth
Like others in its industry, leading defense firm Raytheon (NYSE:RTN) is struggling to grow. Its third quarter financial release last Thursday confirmed its top-line challenges. The wind down of major combat operations across the globe and a cost-cutting mindset in Washington could persist to make sales growth difficult for some time. However, defense spending is not going away; in fact, it should continue to grow internationally, and the larger players are proving adept at cutting costs to keep profits moving forward. Combined with low valuations and high dividend yields, the industry, including Raytheon, are worth a look for patient investors. (For additional reading, check out: Dividend Yield For The Downturn.)
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Third Quarter Recap
Net sales fell 2.2% to $6.1 billion, as modest growth in the integrated defense, intelligence and information, missile, and space and airborne systems segments was more than offset by double-digit sales declines in the integrated defense and network-centric systems units. Technical services posted a more moderate decline of 6%. In general, certain defense projects witnessed increased activity but overall saw a decline in contract work to the U.S. Army, Navy and related defense entities, such as the all but unheard of Defense Threat Reduction Agency.
Reported operating income fell 3.2% to $725 million as operating expenses fell 2.1% to not quite match the sales decline. Higher taxes and income from discontinued operations in last year's quarter combined to contribute to a 31.2% plummet in reported net income to $501 million, or $1.43 per diluted share. Its estimate of adjusted earnings was $1.39, or 3% growth from the previous year. (For additional reading, check out Understanding The Income Statement.)
Outlook
For the full year, Raytheon projects sales between $25 and $25.3 billion, which would be roughly flat from 2010. It expects to report earnings per share in a range of $4.94 to $5.04, though its estimate is $5.55 to $5.65 when backing out items it considers to be one-time in nature.
The Bottom Line
Raytheon has struggled to grow its top line in recent years, but has successfully employed cost-cutting measures to keep profit growth moving forward. Going forward, management plans to emphasize acquisitions and international growth to increase its market share.
At the current share price, Raytheon trades at a forward P/E of below 9. This is below the level of archrivals including Lockheed Martin (NYSE:LMT) at 10 times, ManTech International (Nasdaq:MANT) at 9.6 times, and slightly above L-3 Communications (NYSE:LLL) at 8 times and Northrop Grumman (NYSE:NOC) at 8.4 times. These reasonable valuations come with dividend yields that average well above 3% to offer investors solid income potential while they wait for more clarity on proposed cutbacks to defense spending in the decade to come.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Third Quarter Recap
Net sales fell 2.2% to $6.1 billion, as modest growth in the integrated defense, intelligence and information, missile, and space and airborne systems segments was more than offset by double-digit sales declines in the integrated defense and network-centric systems units. Technical services posted a more moderate decline of 6%. In general, certain defense projects witnessed increased activity but overall saw a decline in contract work to the U.S. Army, Navy and related defense entities, such as the all but unheard of Defense Threat Reduction Agency.
Reported operating income fell 3.2% to $725 million as operating expenses fell 2.1% to not quite match the sales decline. Higher taxes and income from discontinued operations in last year's quarter combined to contribute to a 31.2% plummet in reported net income to $501 million, or $1.43 per diluted share. Its estimate of adjusted earnings was $1.39, or 3% growth from the previous year. (For additional reading, check out Understanding The Income Statement.)
For the full year, Raytheon projects sales between $25 and $25.3 billion, which would be roughly flat from 2010. It expects to report earnings per share in a range of $4.94 to $5.04, though its estimate is $5.55 to $5.65 when backing out items it considers to be one-time in nature.
The Bottom Line
Raytheon has struggled to grow its top line in recent years, but has successfully employed cost-cutting measures to keep profit growth moving forward. Going forward, management plans to emphasize acquisitions and international growth to increase its market share.
At the current share price, Raytheon trades at a forward P/E of below 9. This is below the level of archrivals including Lockheed Martin (NYSE:LMT) at 10 times, ManTech International (Nasdaq:MANT) at 9.6 times, and slightly above L-3 Communications (NYSE:LLL) at 8 times and Northrop Grumman (NYSE:NOC) at 8.4 times. These reasonable valuations come with dividend yields that average well above 3% to offer investors solid income potential while they wait for more clarity on proposed cutbacks to defense spending in the decade to come.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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