Raytheon's Business Continues To Evolve

3/1/2010


  Recent Price
$56
  Dividend
$1.24
  Yield

2.2%

  P/E Ratio
11
  Shares (millions)
388
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$56.37 - $33.20

Raytheon ($56; RTN) was founded in 1922 on a prototype for a home refrigerator. While that product flopped, others did not. Raytheon found a way to power radios with electricity rather than batteries, then produced the first commercial microwave oven and the first successful missile-guidance system. Today, Raytheon is best known for producing missiles and radar vital to U.S. missile defense.

In 2009, Raytheon earned $4.89 per share, up 24%. Revenue advanced 7% to $24.88 billion on growth across all segments. For the year, the operating profit margin from continuing operations rose to 7.9% from 7.3%, while operating cash flow jumped 35%. The summer cancelation of a missile program wiped away $2.4 billion from the backlog, which dipped 5% to $36.88 billion. The funded backlog, however, increased 7% to $23.48 billion.

Raytheon’s operating momentum complements a strong balance sheet and an attractive valuation. Shares trade at 11 times trailing earnings, well below the three-year average of 15. Raytheon, yielding 2.2%, is a Buy.

Business breakdown

Raytheon, like other defense contractors, faces risks because the severe budget deficit could crimp federal defense spending in coming years. But the company’s geographic diversity and broad product line blunts the blow of any single lost contract.

The company operates in 80 countries, and international customers generated 21% of sales and 30% of bookings last year.

Raytheon draws revenue from six segments, none of which accounts for more than 25% of total sales or 30% of operating income.

Integrated defense systems (21% of 2009 sales and 26% of operating income), Raytheon’s most profitable unit,makes a variety of weapons and electronics, most notably the Patriot Air and Missile Defense System.

Missile systems (21%, 19%) produces the Tomahawk cruise missile and missile-defense systems for the navies of more than 30 countries.

Network centric systems (18%, 21%) offers ground-based surveillance and communication products.

Space and airborne systems (17%, 20%) sells radar and infrared sensors used for nontraditional intelligence, surveillance, and reconnaissance.

Intelligence and information systems (12%, 8%) provides computer- engineering services for intelligence organizations.

Technical services (12%, 7%) offers training and other services for counter-terrorism agencies, as well as commercial customers. With 22% sales growth last year, this is Raytheon’s fastest-growing unit.

Conclusion

Raytheon appears well-positioned even if U.S. defense spending slows. To cope with guerilla warfare in Afghanistan, spending could shift toward lighter equipment focused on intelligence, surveillance, and reconnaissance — a trend that would play to Raytheon’s strengths. Moreover, the Pentagon’s new five-year spending plan calls for triple the orders for Raytheon’s missiles as part of a missile-defense system to protect Europe from Iran.

Wall Street forecasts 5% higher revenue this year and per-share-profit growth of 2%. Those targets look unduly low. An annual report for Raytheon Co. can be obtained at 870 Winter St., Waltham, MA 02451; (781) 522-3000; www.raytheon.com.

RAYTHEON
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '09 $1.30 vs. $1.01 + 10% $53.84 -

$45.02

12 - 10
Sep '09 1.25 vs. 1.01 + 6% 48.64 - 41.90 11 - 10
Jun '09 1.24 vs. 1.00 + 4% 48.34 - 38.00 12 - 9
Mar '09 1.11 vs.

0.92

+ 10% 53.00 - 33.20 13 - 8
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $24.88 $4.89 $1.24 $53.84
-
$33.20 11 - 7
2008 $23.17 $3.94 $1.12 67.49
-
41.81 17 - 11
2007 $21.30 $3.31 $1.02 65.94
-
50.96 20 - 15
2006 $20.29 $2.56 $0.96 54.17
-
39.43 21 - 15
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
93 69 93 90 85 18 54

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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