Earnings Analysis: Raytheon (RTN)
Back on October 25, Raytheon announced strong operational results for their third quarter of 2018. Sales were up 8.3% YoY and earnings were up 14.2%. These results were stronger than wall street expected with revenues of $6.81B beating estimates of $6.69B and earnings of $2.25 killing expectations of $1.97 per share. Backlogs also grew to new record levels of $41.6B, increasing by almost $5B YoY. This resulted in a guidance update for 2018 bookings to increase by $1B. Additionally, the company provided a preview to 2019 guidance. Within this guidance, the book to bill ratio is expected to be over 1 (more orders than output), which is bullish. They also guided sales growth of 6%-8%, operating margins to be in line with 2018 results, a tax rate of 17%-19%, and operating cash flow of $3.8B-$4.0B.
Looking for negatives to note, operating margin results were down some and guided down some on the year mainly due to Missiles, which is seeing a number of new development programs which hurt short-term results. Also, results from the Missiles were slightly below expectations as was the results from their cyber initiative. Finally, there were a number concerns around Saudi Arabia after the recent killing of Saudi Arabian journalist, Jamal Ahmad Khashoggi. Feedback from management was that they don't expect major impacts and looking at 2019 they expect Saudi orders to be flat from 2018. They are a global security company, so they don't have any reliance on 1 customer. That said, should something come about, Saudi deals equate to about 5% of 2018 revenues.
In the end, I feel the quarter's results were extremely strong and guidance for the rest of 2018 and 2019 were rather positive. I do believe the market has decided to price in risk concerns of Saudi Arabia sanctions as a part of the overall negative sentiment that has resided lately. It's worth noting, that since this report, the stock's price dropped dramatically - around $20 and has since recovered to prices slightly above where it was when they reported. The stock did suffer hits previous to that too. Given the outlook and continued need for outside countries to support themselves, I foresee continued success for Raytheon. While the US government has increased its spend on defense and that should be seen in 2019, there are concerns, currently, around mid-term elections and whether or not defense spending will remain intact. I believe these are over reactive assessments, given both Republicans and Democrats have been in favor of defense since 9/11. I am maintaining my ranking of a 1 for this stock. I anticipate 2019 earnings of $11.50 and a fair multiple of 20. This results in a 2019 price target of $230.
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Looking for negatives to note, operating margin results were down some and guided down some on the year mainly due to Missiles, which is seeing a number of new development programs which hurt short-term results. Also, results from the Missiles were slightly below expectations as was the results from their cyber initiative. Finally, there were a number concerns around Saudi Arabia after the recent killing of Saudi Arabian journalist, Jamal Ahmad Khashoggi. Feedback from management was that they don't expect major impacts and looking at 2019 they expect Saudi orders to be flat from 2018. They are a global security company, so they don't have any reliance on 1 customer. That said, should something come about, Saudi deals equate to about 5% of 2018 revenues.
In the end, I feel the quarter's results were extremely strong and guidance for the rest of 2018 and 2019 were rather positive. I do believe the market has decided to price in risk concerns of Saudi Arabia sanctions as a part of the overall negative sentiment that has resided lately. It's worth noting, that since this report, the stock's price dropped dramatically - around $20 and has since recovered to prices slightly above where it was when they reported. The stock did suffer hits previous to that too. Given the outlook and continued need for outside countries to support themselves, I foresee continued success for Raytheon. While the US government has increased its spend on defense and that should be seen in 2019, there are concerns, currently, around mid-term elections and whether or not defense spending will remain intact. I believe these are over reactive assessments, given both Republicans and Democrats have been in favor of defense since 9/11. I am maintaining my ranking of a 1 for this stock. I anticipate 2019 earnings of $11.50 and a fair multiple of 20. This results in a 2019 price target of $230.
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities. All views expressed are solely of my own and I am not a professional money manager. Please consult with your financial adviser before taking any action in your own portfolio.
Comments
Post a Comment