Raytheon stumbles despite strong demand for missile systems
At first glance, Raytheon (NYSE:RTN) appears to be a clear winner in the Pentagon’s push toward high-tech surveillance, missile defense, and renewal of the military’s advanced weapons stockpile. But you’d never know from the company’s fourth quarter results or its disappointing 2019 guidance.
The company reported quarterly revenue of $7.36 billion, up 8% year-over-year, but below analysts’ expectations for revenue of $7.46 billion of dollars. Raytheon earned $2.93 per share in the quarter, ahead of estimates, but the pace was due to a substantial benefit from a lower tax rate, which may have offset lower operating results. expectations.
Raytheon also said it expects to generate earnings of $11.40 to $11.60 per share in 2019, below analysts’ expectations of $11.78 per share, on revenue between 28.6 and 29 .1 billion. That’s pretty much what analysts were expecting.
Raytheon is unique among major defense contractors in that it lacks large flagship properties like bombers, tanks, or warships; instead focusing on electronics, sensors, precision weapons, missile defense and cyber, among other areas. The top-notch product portfolio gives it exposure to a wide range of rigs made by other contractors, as well as a prominent seat at the government table. plans to spend hundreds of billions to refresh its missile and missile defense capabilities.
Although Raytheon shares reacted negatively after the release of quarterly figures on January 31, a closer look at the results and projections for the future shows that Raytheon holders need not worry.
Investing for the future
During the quarter, Raytheon experienced some revenue weakness in its cyber and missile businesses, while classified businesses helped both its space and integrated defense systems (ISS) produce higher-than-expected revenue.
Profitability was affected by margin pressure in key areas. The ISS – focused on missile defense, radar, electronic warfare and the command and control systems that run these programs – generated margins about 150 basis points lower than expected due to investments in radar research and development (R&D) and several mature programs that are collapsing. Its missile unit, with margins of 11.8% versus 14% expected, was also hit by early development work and some production reserves.
Many of these factors were in the depressed forecast for 2019, but CFO Toby O’Brien, during a call with investors following the resultswas quick to notice that the R&D work currently underway should bear fruit in the future.
In the long run, it’s positive because it generates those new franchises and those margin expansion opportunities when programs go into production. So I think specifically for missiles we expect them to improve their margins from ’18 and ’19, like I said, to a range of 12.1% to 12.3% . They have clearly been affected by the higher level of classified development programs.
Missile bookings, O’Brien notes, soared nearly 50% to $1.5 billion in 2018.
Raytheon also has a major military training contract that will end in 2019, which will reduce full-year revenue growth, lowering estimates by more than 2%.
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Prospects are still strong
Raytheon has been a high thief over the past five years with its shares up nearly 75% and easily outpacing the S&P 500’s 51.6% gain. Raytheon investors: The company’s shares fell 20% — and down 12.5% in December alone — compared to the S&P’s 4.3% decline over the past 12 months.
Despite concerns about political wrangling and fears lawmakers will struggle to agree on a fiscal year 2020 budget, the case of the bull on Raytheon is intact. The headwinds that have eaten away at fourth quarter results and depressed guidance appear to be more of a speed bump than a cliff, and the government’s appetite for products made by Raytheon is likely to continue for the foreseeable future.
Raytheon generated operating cash flow from continuing operations of $3.4 billion in 2018, beating the midpoint of its guidance for the year by $600 million. Seems sustainable and not just faster-than-expected payouts, pushing the 2018 figure up at the expense of future quarters, as Raytheon raised its estimate for 2019 by $100 million, even after factoring in payouts. additional taxes expected.
This figure is important for investors, as Raytheon intends to return 80% of free cash flow to shareholders through dividends and buybacks. Raytheon has retirement funding requirements to navigate over the next few years. But the cash, along with Raytheon’s low leverage in the sector, also gives the company significant firepower to make an acquisition if management sees an opportunity to bolster its technology portfolio or drive growth.
Raytheon isn’t cheap: Trading at 19.36 times trailing 12-month earnings, it commands a higher valuation than most of its defense peers. If you’re an investor picking defense stocks right now, I still prefer Lockheed Martin for the diversity of its portfolio and General dynamics for its development potential as key business unit gets back on track.
But Raytheon holders with long-term horizons shouldn’t lose faith in the company’s latest results. It’s a great company that takes the pulse of the Pentagon’s priorities that should be set up for growth in the years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.