We expect management at Raytheon Co. (RTN) to focus on its international and cybersecurity businesses to generate stronger growth over the next three to five years, asserts John Eade, analyst with Argus Research.
Raytheon’s business mix appears favorable compared to that of most defense industry peers, and given rising geopolitical threats, we like its emphasis on advanced missile defense, electronic warfare, counter-insurgency and counter-terrorism systems.
In Integrated Defense Systems (IDS), which provides air-and-missile defense systems and naval combat and ship electronic systems, net sales rose 7% year-over-year, reflecting higher sales on an international Patriot missile program that started in 1Q18.
The Missile Systems segment has benefited from strong sales of AIM-9X Sidewinder short-range air-to-air missiles; Paveway laser-guided bombs; and Tube-launched, Optically-Tracked, Wireless-Guided (TOW) missiles. In 2018, we expect sales to grow at a mid-single digit rate, while margins increase slightly above last year’s 13.2%.
In Intelligence, Information, and Services (IIS), which provides services to intelligence customers, revenue and operating income rose 5%. The operating margin was steady at 7.4%.
On April 26, Raytheon posted quarterly results that once again topped expectations. Net sales rose 4.5% to $6.3 billion. The total business segment operating margin increased 10 basis points to 11.9%. EPS from continuing operations rose 27% to $2.20, ahead of the consensus forecast of $2.11. Total bookings came to $6.3 billion, up 11% from the prior year. Along with the results, management raised guidance for 2018 EPS.
Turning to our estimates, based on the solid bookings trend as well as expectations for lower taxes, we are raising our 2018 to $9.86 from $9.70. We look for another year of double-digit growth in 2019 and are boosting our preliminary EPS forecast from $11.15 to $11.33. Our five-year earnings growth rate forecast is 10%.
The company is also generating strong cash flow and aggressively returning cash to shareholders through increased dividends and share buybacks. Our rating is "buy".
Our target price of $235, raised from $225, implies premium valuations — which we believe that Raytheon merits given its well-positioned portfolio of businesses and its growth outlook. The shares are a suitable core holding for a diversified portfolio.
