Raytheon Continues to Report Improved Earnings

| About: Raytheon Company (RTN)

Raytheon Co. (NYSE:RTN) continues to consistently report improved year-over-year revenue and EPS results.

The bullish story on Raytheon revolves around signs of an improving business jet market, increased defense spending, superior backlogs, and strong cash flow. Revenue and earnings growth continue to be driven by strong demand for missile and missile defense systems as well as network-centric mission solutions, including sensor and communication systems.

Raytheon announced strong financial results for its 1st quarter of 2009. Excluding non-recurring items, earnings from continuing operations were $457 million, or $1.11 per diluted share ($1.12 basic), up 14%, compared to earnings of $401 million, or $0.92 per diluted share ($0.94 basic), in the year-ago quarter. In the reported quarter, net income increased to $452 million, or $1.12 per diluted share ($1.13 basic), from $398 million, or $0.92 per diluted share ($0.94 basic), recorded in the prior-year quarter.

Net sales for the 1st quarter of 2009 increased 10% to $5.9 billion versus $5.4 billion in the 1st quarter of 2008, with growth across all of the company's businesses.

Outlook: Raytheon raised its fiscal 2009 guidance and expects net sales to be within the range of $24.4 to $24.9 billion compared to prior guidance of $24.3 to $24.8 billion and earnings per share (NYSEARCA:EPS) from continuing operations to be within the range of $4.55 to $4.70 up from the prior range of $4.45 to $4.60.

We continue to view Raytheon as one of the best positioned among the large-cap defense primes due to its non-platform-centric focus, strong order bookings and order backlog, strong cash flow generation, and focus on shareholder value. Specifically, revenue and earnings growth are driven by strong demand for missile and missile defense systems and network-centric mission solutions, including sensor and communication systems.

The company also offers investors strong order bookings (notable contracts include STOC II and FOCUS program for the U.S. Army, AMRAAM for both international customers and the U.S. Air Force, Standard Missile-3 for the U.S. Navy and the Missile Defense Agency, and Evolved Sea Sparrow Missiles for international customers and the US Navy), an above-industry ROE, an improving balance sheet and one of the highest dividend yields in the industry.

In the 1st quarter of 2009, Raytheon witnessed a brisk pace in its order backlog with total bookings of $5.2 billion and an order backlog of $37.9 billion. Going forward, growth will be driven by focus on ISR unmanned systems, training, cyber security, Standard Missile-3, Patriot, Zumwalt and THAAD. Furthermore, the recent acquisition of Telemus Solutions, a provider of information security, intelligence and technical services, strengthens the company's focus on the emerging cyber security market.

Looking ahead, however, concerns about the future growth of defense spending on Raytheon programs, given continuing budget deficits as well as concerns related to the company's program execution, remain ongoing risks.

Over the past year, RTN traded within a range of 7.0x to 13.8x then current-year earnings estimates. Presently, RTN trades at only 9.6x and 9.1x, respectively, our 2009 and 2010 EPS estimates, or at a significant discount to its military electronics industry median and mean multiple values. Likewise, relative sales and cash flow multiples both indicate a discount valuation of RTN.

Accordingly, with a predominantly bullish outlook, partially offset by several company-specific risks, and an attractive valuation, we note a bias toward outperformance, and maintain our BUY recommendation on RTN stock with a six-month target price of $51.50, or 10.7x and 10.2x, respectively, our 2009 and 2010 EPS estimates.

Price appreciation to our near-term valuation target, combined with the stock's recently increased $0.31 per share quarterly cash dividend -- which we deem sustainable and secure based upon conservative projected payout ratios -- represents annualized total return potential of 27.5%.

Raytheon is the one of the largest aerospace and defense companies in the U.S., with a well-diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.

--Jon Kolb