Raytheon Misses on Earnings, Grows Y/Y - Analyst Blog

Raytheon Company RTN reported first quarter 2014 adjusted earnings of $1.62 per share, missing the Zacks Consensus Estimate of $1.76 by 8.0%. The lower-than-expected results were due to soft sales.

However, earnings increased 3.2% from the year-ago adjusted profit level of $1.57, mainly driven by efficient program execution.

Operational Performance

The company's top line at $5,508 million registered a 6.3% fall year over year. The reported number also missed the Zacks Consensus Estimate of $5,547 million by 0.7%.

New bookings in the first quarter were $4.3 billion versus $3.6 billion in the year-ago period. Total backlog at the end of the quarter was $32.2 billion (down 4.1% year over year) and funded backlog was $22.7 billion (down nearly 1%).

Total operating expenses were $4,720 million, down 8.8% year over year. Operating income during the quarter was $788 million, up 11.6% from the year-ago level of $706 million.

Quarterly Segment Performance

Integrated Defense Systems (IDS): Segment revenue decreased 7% year over year to $1,481 million due to the completion of some production phases of two international Patriot programs.

Segment operating income also declined 14% year over year to $226 million.

Intelligence, Information and Services (IIS): Segment revenue was down 5% year over year to $1,450 million due to lower volume on training programs. Operating income in the reported quarter increased marginally by 1% to $125 million.

Missile Systems MS: Segment revenue decreased 4% year over year to $1,574 million. Weak net sales were a function of lower sales on U.S. Army programs. Operating income also dropped 3% year over year to $208 million on account of lower volume.

Space and Airborne Systems (SAS): Revenue in the quarter declined 12% year over year to $1,398 million. The decline in revenue was due to lower sales volume on classified as well as tactical communications systems programs. Operating income also dropped 16% year over year to $190 million due to lower volumes and contract mix.

Financial Update

Raytheon ended the first quarter 2014 with cash and cash equivalents of $3,036 million versus $3,296 million as of Dec 31, 2013. Long-term debt was $4,735 million, almost at par with the debt level of $4,734 million as of Dec 31, 2013.

Raytheon's capital expenditure was $39 million in the reported quarter, down from the year-ago spending level of $49 million.

In the reported quarter, Raytheon repurchased 2.1 million shares of common stock for $200 million as per its share repurchase program. In March, Raytheon increased its quarterly dividend by 10%, bringing the annualized dividend to $2.20 per share from the previous payout of $2.00 per share. This is the company's ninth consecutive annual dividend increase.

Guidance

For 2014, Raytheon reaffirmed it top-line projection in the range of $22.5–$23.0 billion. The company's adjusted earnings per share are maintained in the $5.76 to $5.91 range. The Zacks Consensus Estimate is pegged higher at $6.94 for 2014.

The defense major expects operating cash flow from continuing operations in the range of $2.3 billion to $2.5 billion for full-year 2014.

At the Peers

Pentagon's prime contractor, Lockheed Martin Corp. LMT, posted impressive first quarter 2014 earnings before the opening bell amid an uncertain budget environment. The company reported quarterly earnings of $2.87 per share, comfortably surpassing the Zacks Consensus Estimate of $2.52 by 13.9%. Earnings in the reported quarter also surged 27.6% from $2.25 in the year-ago quarter.

Boeing's closest peer, Northrop Grumman Corp. NOC reported first quarter 2014 adjusted earnings of $2.40 per share, surpassing the Zacks Consensus Estimate of $2.15 by 11.6%.

Another defense major, General Dynamics Corp. GD, posted first quarter profit of $1.71 per share, beating the bottom line consensus of $1.63 by 4.9%. The reported figure also increased 5.6% year over year.

Our Take

Although this defense major failed to match the consensus estimates on both top and bottom line, an uninterrupted dividend increase demonstrated the company's financial strength and dedicated capital deployment strategy. Again, the company successfully boosted its bottom line backed by prudent cost management.

With rising demand from the Gulf countries as well as from the Asia-Pacific region, we believe international sales will continue to be the company's key revenue driver. Contributions from foreign defense contracts are expected to touch 30% total revenues in 2014, exceeding the 2013 level of 27%.

Raytheon aims to achieve total bookings of nearly $23.5 billion in 2014. Orders coming in from 80 countries from across the world will help Raytheon to meet this target.

Zacks Rank

Raytheon, Northrop Grumman, Lockheed Martin and General Dynamics all hold bullish a Zacks Rank #2 (Buy) and are worth accumulating at current levels.