Earnings Scorecard: Raytheon 2017 Q4
- The defense contractor reported a mixed earnings report with some strong revenue segments.
- The missile maker increased its backlog significantly and raised its 2018 fiscal guidance.
- The corporate tax cuts will help increase Raytheon’s free cash flow for dividends and strategic investments.
The third-biggest U.S. defense contractor, Raytheon reported a mixed quarter with a slightly weak revenue number. Raytheon reported earnings of $1.35/share which cannot be compared with Wall Street expectations of $2.05/share because of one-time charge offs due to corporate tax changes. The revenue reported of $6.78 billion (up 8% from last year) was slightly weak because of all orders Raytheon has been getting from governments around the world and can be chalked up to operational execution. I was expecting Raytheon to at least report 10% revenue growth from last year given the military spending that has been triggered by potential geopolitical events (e.g. North Korea and the Middle East).
Looking at the report in more detail, the revenue segments reported modest growth numbers with the most growth coming from the missile systems revenue which was up 15% from a year ago. The other segments had the following revenue growth:
- Integrated Defense Systems- 6%
- Intelligence, Information & Services- 4%
- Space and Airborne Systems- 4%
A total of $1.3 billion in potential revenue from all the segments was written off to eliminations which is probably why the company missed expectations. Also, the operating margin was weak at 12.8% down from 14% and management might need to control costs. The company did increase its backlog with increased bookings by $8.5 billion and the backlog is now up to $38.2 billion. This backlog is likely going to increase with more defense spending coming from European NATO members who will be looking to bolster their contributions to the alliance.
Looking at the outlook from management for fiscal 2018 with the boost tax reform, the effective tax rate for the company will be 19% down from 35%. From this alone, the company is going to be generating $1.1 billion in extra free cash flow and management now expects to generate up to $4 billion in free cash flow in 2018. The increased cash flow will be able to help management make strategic investments in the company as well as reward shareholders with increased dividends and share repurchases. I hope management makes some strategic M&A plays in the area of cybersecurity. There are some interesting plays in that sector like PaloAlto Networks or FireEye. In terms of the valuation, Raytheon is trading at 18 times next year's earnings with quarterly revenue growth of 8% the stock should be trading close to $225 in the next 3–6 months. However, the company needs to improve its operational efficiency with fewer eliminations so that we see continued earnings growth. Raytheon is well-positioned in this defense sector with its missile system products.
Grade: B-
Estimates: Earnings-$2.05; Revenue- $6.925 billion (Ranking of 39/42 on Estimize)
Disclosure: Cresco Investments is long Raytheon (Stock Ticker: RTN).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.
