Raytheon Company (RTN)

LEGMAKER (74.41) Submitted: 5/12/08 9:47 AM : Start Price: $64.04 RTN Score: -0.76

As you know, I have been really pounding the table with respect to aerospace and defense stocks. The main reason is most are centered in the United States and countries from all over, with strong currencies are going to stock up on technology to protect themselves from threats abroad. Also, emerging markets use warplanes and ships as a way to show the world that they have become a leader. It's kind of like that couple that just inherited a substantial amount of money from their parents, they could invest their money in the future to pay off debt, but instead they go off and buy an Escalade. There is also another reason, and that is hate. Just look at how some countries view each other from altercations of the past. A good example is China, who has been in the shadow of Japan for a long time; they are beginning to purchase high tech war components as it does have the effect of showing up those who have hurt them in the past.





I believe this entire sector looks good, not just on valuation but growth. Even if the dollar starts to recover, there will still be an effective sale on US goods for sometime and purchases will continue. This entire sector has had good earnings this quarter. All have at least beaten including GD, LMT, and COL. There is a marked decrease in spending for military in 2009 which is about 10% but it is escalating back upwards through at least 2013. Most of the decrease in spending is due to a deceleration of forces in Iraq. Also the defense sector is a good value here as it had begun to fall in November of last year on lagging issues with the economy and bad news out of Boeing. Let's not forget, China is increasing their military by double digits which were an increase of almost 18% this year alone.





The first quarter was a good one for Raytheon as they beat EPS expectations by over 10%. This quarter they booked $6.5 billion in work, an increase of 25%, and have a backlog of $37 billion. Sales were up 11% year over year. Operating income was up 17%. EPS was up a very good 31%. They repurchased 5.5 million shares. Annual dividend was increased by 10%. They saw double digit growth in 4 of their 6 areas of work. Operating margins bettered by 60 basis points. RTN's outlook for the rest of the year is quite good, and even these large increases of growth look conservative with respect to the world environment. With respect to sales, the rest of the year by quarter will increase at the very least by 24%, and EPS growth 22%.





The reason RTN looks so good is the same reason they have lagged the sector over the past few years, technology. Their missles and missle defense systems are in strong demand. Countries have found that their current technologies are much better and will pay more money for them. It also looks good on valuation. They recorded an excellent quarter, as I stated earlier, but the stock was not rewarded. With the price of the stock declining on slower forecasted sales growth, analysts sold the stock off. This looks to be an opportunity going forward as later the CEO clarified the company's position with respect to the rest of the year. He stated Raytheon will not approximate sales not yet received and would rather calculate in wins with respect to the company after it has been inked in a deal. So the possible full year growth of 5%-8% is without any new contract wins, which seems quite impossible given the current market.





Also remember that major increases in margins were seen in work that is increasing the most with respect to the company. Technical service and missle systems are their hot commodity and demand is pushing costs up and will continue to do so. Their current margins are better than BA, LLL, and NOC. I would expect any company in this sector is a good buy, but RTN has an exceptional value over the next three months at $70.

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