Raytheon Company (RTN) is scheduled to report fourth-quarter 2014 results before the opening bell on Jan 29, 2015. Last quarter, the company posted a positive earnings surprise of 2.48%. Let’s see how things are shaping up for the fourth quarter.
Factors that Influence Q4 Results
Given the decline in U.S. defense spending, Raytheon, like its peer General Dynamics Corp. (GD), is focused on cost-cutting initiatives, research and development (“R&D”) and expanding product capabilities in order to remain competitive and boost revenues.
In the first nine months of 2014, Raytheon successfully reduced its operating expenses by 7.91% as compared to the same period in 2013. In fact, management raised the low end of the adjusted operating margin guidance to the range of 12.7–12.8% from the prior expectation of 12.6–12.8% in anticipation of the effect of cost reduction.
We appreciate Raytheon’s focus on R&D, which enhances the quality of its product offerings and ensures regular contract wins, especially from foreign shores. In Dec 2014, Raytheon won a foreign military sales (“FMS”) contract worth $2.4 billion to supply 10 Patriot missile defense systems to Qatar. In fact, FMS represented 28% of the total net sales in the first nine months of 2014, up from 27% in the year-ago period. This led the company to revise its revenue projections to the range of $22.7–$23.0 billion from the earlier expectation of $22.5–$23.0 billion, with FMS bookings expected in the range of 35–40% of total bookings in 2014.
Raytheon generates a large part of its revenues from the U.S. Department of Defense (“DoD”). With the ongoing sequestration, there is no assurance that the company will continue to score high-value contracts at regular intervals. It is worth noting that sales to the DoD dropped 7.5% in the first nine months of 2014 compared to the prior-year period. In addition, Raytheon faces tough competition from various players in the defense industry, which could further hamper its results.
Earnings Whispers?
Our proven model does not conclusively show that Raytheon will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. That is not the case here as you will see below.
Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.12%. This is because the Most Accurate estimate of $1.76 per share is slightly lower than the Zacks Consensus Estimate of $1.78.
Zacks Rank: Raytheon’s Zacks Rank #3 (Hold) when combined with a -1.12% ESP makes an earnings beat unlikely.
We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some stocks in the same industry you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this season
Northrop Grumman Corporation (NOC) has an Earnings ESP of +4.05% and carries a Zacks Rank #3.
Spirit AeroSystems Holdings, Inc. (SPR) has an Earnings ESP of +7.79% and carries a Zacks Rank #1.
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