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Raytheon (RTN) Review: I find GD more attractive

|Includes: GD, Raytheon Company (RTN)

Raytheon is one of the major US defense contractors (along with GD, NOC, LMT and BA) to the US government (85% of sales).  The company is in the idea pipeline as one of my legacy investments.

Please refer to the Quick review explained post if you have questions on what I look for in this analysis.

 

1- Business Performance Risk (=/-) and Intrinsic Returns (=)

Metric

Status

FCF / Sales

Last twelve months: 8.7%, in line with historical ranges between 3.5% (even negative in 2001) to 11.7%

ROE

LTM: 17%; RTN’s ROE was between 15% and 21% over the last 4 years, however in previous year it has been in the single digit, even negative a couple of years!

ROA

LTM: 7% - similar to ROE, ROA has been better over the last 4 years between 7% and 11% but was in the single digit and even negative before.

Revenue Growth

The long term growth trend of RTN has been between 2 and 4% with ups and down between +11% to -8% in 2006.  On a LTM basis the company has been slightly declining

Cash distribution to shareholders

RTN pays a 2.9% dividend yield on a payout of 30-35%

The company is also buying back shares and has retired ~15% of its stock over the last 5 years.

Overall RTN’s business performance has been ok over the last few years, albeit with a low growth and ROA. Compared to General Dynamics however, it seems that the company is more exposed to cyclicality and has lower returns and free cash flow generation.

On the intrinsic returns front, the company is paying a 2.9% yield on 30% of earnings, could grow at 4-5% (re-using 30% of its earnings at a ROE of 15%) and using the remaining 40% of earnings to improve its cash position or buy back shares (3.5% at the current earnings yield of 9.3%).  This would lead to a 10-11% return, all in.

 

2- Balance Sheet Risk (+)

Metric

Status

LT Debt / Equity

LTM: 0.24x

Current Ratio

1.36x, in line with past levels

RTN’s balance sheet risk appears limited with a current ratio in line with past levels and industry norms.  The debt ratio is also conservative, especially taking into account the large portion of intangibles on the B/S.

 

3- Valuation Risk (+)

Metric

Status

Cash Return

12.3%

P/E

10.7x

RTN’s current valuation appears conservative, with a high cash return and a lower than industry and S&P 500’s P/E.  These compare to GD’s 9.4% cash yield and 10.1x P/E

 

Conclusion

RTN’s business seems to suffer from cyclicality more than GD which has generated more consistent returns and growth for its shareholders. In this context I would need a more attractive valuation for RTN to maybe invest vs. GD to provide for an additional margin of safety as I see RTN as lower quality. I will pass on RTN for now and swap the position for GD stock (while waiting to find time to do a GD Company analysis).  I will revisit in a year to evaluate how its returns and growth are doing.

 

You can find other similar "Quick Reviews" as well as more in-depth "Company Analysis" on my blog, Margin of Safety Investing

Many happy returns,

Ben



Disclosure: Long GD, sold RTN