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Can Raytheon (RTN) Keep the Earnings Streak Alive in Q1?

Zacks Equity Research
Updated

Missile maker, Raytheon Company RTN will release first-quarter 2016 financial results before the market opens on Apr 28. In the prior quarter, Raytheon reported a positive earnings surprise of 7.82%. In fact, the company has beaten estimates in each of the trailing four quarters. Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Raytheon is likely to beat earnings this season because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to beat estimates, and Raytheon has the right mix.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +0.74%. This is because the Most Accurate estimate stands at $1.37, while the Zacks Consensus Estimate is pegged slightly lower at $1.36. This is a meaningful indicator of a likely positive earnings surprise.

Zacks Rank: Raytheon currently carries a Zacks Rank #3.

The combination of Raytheon’s Zacks Rank #3 and positive ESP make us reasonably confident of an earnings beat.

Conversely, Sell-rated stocks (#4 or #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

What is driving the Better-than-Expected Earnings?

Raytheon’s missiles and ship defense systems will continue to witness strong demand. Its Patriot missile-defense systems have been seeing a number of buyers of late. Management stated that the Integrated Defense Systems (IDS) division, which includes Patriot, will report strong margins in the to-be-reported quarter on the back of solid performance as well as an expected contract modification. The segment will likely return to generating 16–17% margins within the next 2–3 years, as international volumes ramp up and the company progresses on development programs.

The missile maker may not have clinched a billion dollar order this quarter, but it has won several programs in the $500 million range. One of such deals include the production of two satellite sensors for the National Aeronautics and Space Administration (NASA), as part of the National Oceanic and Atmospheric Administration's (NOAA) Joint Polar Satellite System (JPSS) Polar Follow-On missions. Another contract covers the supply of the Advanced Medium Range Air-to-Air Missiles to the U.S. Air Force.

Meanwhile, a strong cash flow generation capability has helped Raytheon to fund a share buyback program and boost shareholder value. In March, the board of directors approved a 9.3% hike in the annual dividend to $2.93 per share from $2.68. The board has also authorized the payment of a quarterly cash dividend of 73.25 cents per outstanding share of the common stock.

Other Stocks that Warrant a Look

Here are some other companies you may want to consider as our model shows that they too have the right combination of elements to post an earnings beat:

Spirit AeroSystems Holdings, Inc. SPR has an Earnings ESP of +6.60% and a Zacks Rank #1. The company will report quarterly results on Apr 29, 2016.

Huntington Ingalls Industries, Inc. HII has an Earnings ESP of +0.47% and a Zacks Rank #2. The company is scheduled to report quarterly results on May 5.

General Dynamics Corp. GD has an Earnings ESP of +1.40% and a Zacks Rank #3. The company is scheduled to report quarterly results on Apr 27.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
GENL DYNAMICS (GD): Free Stock Analysis Report
 
SPIRIT AEROSYS (SPR): Free Stock Analysis Report
 
RAYTHEON CO (RTN): Free Stock Analysis Report
 
HUNTINGTON INGL (HII): Free Stock Analysis Report
 
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Zacks Investment Research