Raytheon Shows Stability on Fundamentals - Analyst Blog

On March 28, 2014, we issued an updated research report on Raytheon Company RTN. This defense major surpassed the Street consensus in its fourth quarter 2013 earnings release. For the last four quarters the company came out with higher-than-expected earnings with an average surprise of approximately 19.7%.

Given the declining U.S. defense spending trend, Raytheon is one of the best-positioned companies among the large-cap defense players due to its non-platform-centric focus. Its diversified military products and GaN technology have helped the company gain a mixture a small and big defense contracts.

Foreign military contracts continue to be the vital growth driver for Raytheon. International sales (sales to customers outside the U.S. including foreign military sales through the U.S. government) represented 27% of total revenues in 2013, up 3% year over year. International sales are expected to rise in the mid single digit, contributing 30% of projected 2014 sales.

Approximately 80 countries procure Raytheon products and hold a higher margin mix upon full production. This mix will likely aid Raytheon's overall industry-leading margin performance well into mid-decade.

Although budget sequestration has taken its toll on defense contractors, Raytheon appears to have clinched high-value contracts during the fourth quarter. Orders were even stronger with a book to bill in the quarter of 1.28x.

Recently, this Zacks Rank #1 (Strong Buy) defense prime boosted its annual dividend by 10.0%, marking the 10th consecutive annual increase. The company has increased the quarterly dividend to 60.5 cents per share from 55 cents per share, bringing the annualized payout to $2.42 per share. With this the dividend yield comes to 2.4%, outpacing the industry yield of 1.8%.

The company had approximately $2.4 billion of free cash flow in 2013. Hence, its solid financial position well cushions the payout. Raytheon ended 2013 with cash and cash equivalents of $3.3 billion, up 3.4% from the year-ago figure of $3.2 billion.

Apart from Raytheon, other well-placed players in the industry include Huntington Ingalls Industries, Inc. HII, Wesco Aircraft Holdings, Inc. WAIR and Northrop Grumman Corp. NOC. While Huntington Ingalls and Wesco Aircraft hold a Zacks Rank #1 (Strong Buy), Northrop Grumman carries a Zacks Rank #2 (Buy).