JPMorgan Confident In Raytheon Heading Into 2017

"With a book to bill of 1.13x YTD, RTN is setting up for growth in 2017 and management sees full year bookings of ~$26 billion, with ~35 percent from overseas. This implies a book-to-bill of 0.99x for 2H. We model 4.4 percent growth in 2017 and are growing increasingly comfortable with this estimate," analyst Seth Seifman wrote in a note.

Seifman, who increased his price target by $6 to $145, pointed to improved margins from IDS and the missile systems units.

After a few quarters of disappointments, IDS' EBIT margin was 15.5 percent, with productivity responsible in part for driving the improvement.

"A positive cumulative adjustment also contributed to strong performance and so the Q2 level is not sustainable and we estimate a margin of 13.9 percent for 2H to bring us into line with guidance of 16.3 percent for the year," Seifman noted.

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A Look Ahead

For 2017, the analyst expects ramping Patriot to drive the EBIT margin to 15.0 percent, representing 140 bps of 2016's level improvement, excluding certain items.

"We do, however, view this as a risk area and each 50 bp change in the IDS margin has a 7 cent impact on EPS," Seifman continued.

Meanwhile, the analyst expects missiles systems sales to grow 8 percent in FY16 and be "still solid" at 5 percent in FY17. The segment is benefiting from the current Middle East conflict and longer-term strategic initiatives.

Seifman estimates that Raytheon will generate $2.9 billion of cash from operations this year and have free cash flow of $2.4 billion.

Meanwhile, the analyst has raised his FY16 EPS estimate by $0.15 and lowered FY17 estimate by $0.10 to $7.40 and $8.05, respectively.

Moreover, the decline in discount rates this year may hurt GAAP EPS if it carries on until year end.

"For RTN, every 25bps change in the discount rate reduces EBIT by ~$80 million, and so the ~80bps decline in the Moody's AA corporate rate this year would reduce our FY17 EPS estimate of $8.05 by ~65c," Seifman elaborated.

Shares of Raytheon closed Friday's regular trading at $139.53.<?p>

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