I find Raytheon Co. (NYSE:RTN) stock to be an excellent combination of value and dividend growth stock. Despite the tepid defense budget, the company has been able to get new deals. The company has a large backlog of $33 billion and its latest quarter book-to-bill ratio was 1.19. In my opinion, Raytheon still has plenty of room to move up. RTN has compelling valuation metrics and strong earnings growth prospects. Furthermore, the company is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments.
Raytheon is the world's fifth largest military contractor and a leading maker of missiles and radar. The company is specializing in defense and other government markets throughout the world. Raytheon was founded in 1922 and is based in Waltham, Massachusetts.
Raytheon operates in four reportable segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems and Space and Airborne Systems.
A comparison between the segment's revenue in the first six months of 2014 to that of 2013 is shown in the chart below.
Data: company's report
The Space and Airborne Systems segment showed the highest sales decline in the first six months of 2014, sales were $2,903 million, a 9.3% decrease from $3,202 million in 2013. Operating margin was at 13.5% in 2014 and 13.8% in 2013. Operating margin improved in the second-quarter of 2014 to 13.4% from 13.3% in the second-quarter of 2013.
The table below presents the valuation metrics of RTN, the data were taken from Yahoo Finance and finviz.com.
Raytheon's valuation metrics are very good; the company has a relatively low debt, the enterprise value-to-revenue ratio is quite low at 1.27 and the enterprise value-to-EBITDA ratio is very low at 8.57. According to finviz.com, RTN's next financial year forward P/E is very low at 11.97 and the average annual earnings growth estimates for the next 5 years is high at 11.70%. These give a very low PEG ratio, for a large cap company, of 1.02. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Latest Quarter Results
On July 24, Raytheon reported its second-quarter 2014 financial results; EPS were in-line with expectations and revenues were above estimates.
The company reported second quarter 2014 EPS from continuing operations of $1.59 compared to $1.50 in the second quarter 2013. Second quarter 2014 Adjusted EPS was $1.41 per diluted share compared to $1.64 per diluted share in the second quarter 2013. Net sales for the second quarter 2014 were $5.7 billion compared to $6.1 billion in the second quarter 2013.
In the report, Thomas A. Kennedy, Raytheon's CEO said:
Demand for Raytheon's innovative and affordable solutions from our global customers was strong in the quarter, and international opportunities in the second half of the year are significant. Second quarter sales, earnings and cash flow all exceeded our expectations, reflecting the continuing hard work and dedication of the Raytheon team.
Dividend and buy-back program
Raytheon has been raising its dividend payment since 2002. The forward annual dividend yield is at 2.59%, and the payout ratio is only 35%. The annual rate of dividend growth over the past three years was very high at 23.5%, over the past five years was also very high at 19.2%, and over the past ten years was high at 12.9%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and RTN's performance has been impressive in this respect.
Since the company generates lots of cash, and the payout ratio is low, there is a good chance that the company will continue to raise its dividend payment.
In the second quarter 2014, the Company repurchased 2.6 million shares of common stock for $250 million. Year-to-date 2014, the Company repurchased 4.6 million shares of common stock for $450 million.
Competitors and Group Comparison
A comparison of key fundamental data between Raytheon and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
Raytheon's valuation metrics look better than those of its main competitors. Raytheon has the strongest earnings growth prospects, the lowest forward P/E ratio, and by far the lowest PEG ratio among the stocks in the group.
Raytheon's return on capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.
The charts below give some technical analysis information.
The RTN stock price is 0.29% below its 20-day simple moving average, 1.76% below its 50-day simple moving average and 2.09% above its 200-day simple moving average. That indicates a short-term downtrend and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -1.08 and ascending, which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 48.84, which do not indicate overbought or oversold conditions.
Analyst opinion is divided, among the twenty-two analysts covering the stock, five rate it as a strong Buy, Six rate it as a Buy and eleven analysts rate it as a Hold.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering RTN stock there are only six analysts who have the four or five star rating, four of them recommend the stock, and two analysts have a Hold rating on the stock.
After significantly outperforming the market in 2013, RTN's stock has been underperforming lately. After reporting EPS in-line with expectations and revenues above estimates, on July 24, RTN stock is down about 2.2%. Since the beginning of the year, RTN's stock has gained only 2.8% while the S&P 500 index has increased 7.1%, and the Nasdaq Composite Index has risen 6.4%. However, since the start of 2013 RTN's stock has gained 62.1% while the S&P 500 index has increased 38.8%, and the Nasdaq Composite Index has risen 47.2%.
According to the military news website DoDBuzz.com, in its publication from July 18, congress plans to boost the Tomahawk missiles fleet:
Following suit with the House Armed Services Committee's mark-up of the fiscal year 2015 defense bill, the Senate Appropriations Committee recently announced it hopes to add $82 million for Tomahawk production in 2015. The move raises planned Tomahawk production for 2015 from 100 missiles to 196. The fiscal year 2015 budget proposal had called for 100 Tomahawk missiles to be produced in 2015 before stopping production in 2016 until re-certification in 2019.
On July 16, Raytheon announced that it has received a $235.5 million contract for Radar Digital Processor kits to upgrade the combat-proven Patriot Air and Missile Defense System for the US and two partner nations.
The new orders for these two Raytheon's important missiles systems are very positive for the company, since it demonstrate that despite the tepid defense budget the company has been able to get new deals.
The Company had bookings of $6.8 billion in the second quarter 2014, resulting in a book-to-bill ratio of 1.19. In the second quarter 2013, bookings were $5.3 billion. Year-to-date 2014 bookings were $11.1 billion compared to year-to-date 2013 bookings of $8.9 billion.
Source: Q2 Earnings Presentation
Seventy two percent of Raytheon's revenues came from the U.S. military in 2013 (73% in 2012 and 74% in 2011), though international orders have been an area of strength in recent periods, and are expected to represent about 30% of 2014 sales.
Raytheon is expected to show strong earnings growth. Although according to Raytheon management's revised guidance, its estimate of net sales for 2014 of $22.5-$23.0 billion are lower than the actual $23.7 billion net sales in 2013, the company is expecting an increase in its EPS from continuing operations of about 15% from $5.96 to $6.74-$6.89.
The company depends on the U.S. Government for a substantial portion of its business and changes in government defense spending and priorities could have consequences on its financial position, results of operations and business. Raytheon's international business is subject to geopolitical and economic factors, regulatory requirements and other risks. According to Raytheon, it enters into fixed-price and other contracts, which could subject it to losses in the event that it faces cost growth that cannot be billed to customers.
Raytheon has compelling valuation metrics and strong earnings growth prospects; its EV/EBITDA ratio is very low at 8.57, and its PEG ratio is only 1.02. Raytheon is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments. For the full-year 2013, the company has repurchased 15.2 million shares of common stock for approximately $1.1 billion, and year-to-date 2014, the company repurchased 4.6 million shares of common stock for $450 million.
All these factors lead me to the conclusion that RTN stock still has room to go up. Furthermore, the rich dividend represents a gratifying income.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.