Why Is Raytheon (RTN) Down 6.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Raytheon (RTN). Shares have lost about 6.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Raytheon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Raytheon Q2 Earnings Top, Sales Improve Y/Y, View Up

Raytheon Company reported second-quarter 2019 earnings per share (EPS) of $2.92 from continuing operations, which surpassed the Zacks Consensus Estimate of $2.61 by 11.9%. The bottom line also improved a solid 5% from $2.78 registered in the year-ago quarter. The year-over-year improvement was driven by operational improvements and pension-related items.

Operational Performance

Raytheon's second-quarter sales of $7,159 million increased 8.1% year over year and also exceeded the Zacks Consensus Estimate of $7,005 million by 2.2%.

The company’s bookings totaled $9,475 million compared with $8,694 million in the year-ago quarter, reflecting an improvement of 9%. Total backlog, at the end of second-quarter 2019, was $43.1 billion, up 4.9% from the previous quarter’s figure.

Total operating expenses increased 8.3% to $5,983 million. The company’s operating income of $1,176 million rose 6.9% year over year.

Segmental Performance

Integrated Defense Systems: Sales at this segment grew 8% year over year to $1,641 million driven by higher net sales on various international Patriot programs. Meanwhile, operating income inched up 1% to $264 million.

Intelligence, Information and Services: Sales at this segment totaled $1,777 million, up 5% from $1,687 million recorded a year ago. The top-line improvement can be attributed to higher net sales on classified programs in both cyber and space.

Operating income in the reported quarter also improved 26% to $161 million from $128 million a year ago, driven by higher net program efficiencies.

Missile Systems: Sales at this segment grew 8% to $2,210 million from $2,051 million in the year ago quarter, led by increase in net sales from classified programs, the High-speed Anti-radiation Missile program and the Phalanx program. Moreover, operating income increased 10% to $253 million due to higher volume and a favorable change in program mix.

Space and Airborne Systems: At this segment, sales grossed $1,817 million, which increased 13% from the year-ago quarter number. This upside was driven by higher net sales on classified programs, the Next Generation Overhead Persistent Infrared (Next Gen OPIR) program and an international tactical radar systems program. Also, operating income rose 11% to $229 million on increased volume.

Forcepoint: This commercial cyber-security segment generated net revenues of $156 million in the second quarter, up 5% from $148 million a year ago.

Moreover, the joint-venture entity incurred an operating loss of $3 million compared with an operating loss of $8 million in the prior-year quarter.

Financial Update

Raytheon ended the second quarter with cash and cash equivalents of $2,173 million, down from $3,608 million as of Dec 31, 2018. Long-term debt summed $4,257 million compared with $4,755 million as of Dec 31, 2018.

Operating cash flow from operating activities amounted to $412 million at the end of second-quarter 2019 compared with that of $1,439 million at the end of second-quarter 2018.

Furthermore, Raytheon repurchased 1.7 million shares of common stock for $300 million in the quarter under review.

The company paid dividends worth $510 million in the first half of 2019 compared with $480 million in the year-ago period.

2019 Guidance  

Raytheon raised its financial guidance for 2019. The company currently expects earnings from continuing operations to come around $11.50-$11.70 per share compared with $11.40-$11.60 projected earlier. Currently, the Zacks Consensus Estimate for full-year earnings is pegged at $11.62, higher than the mid point of the company’s projected guided range.

Also, the company now expects to generate revenues in the range of $28.8-$29.3 billion compared with $28.6-$29.1 billion anticipated earlier. The Zacks Consensus Estimate for full-year revenues stands at $28.9 billion, which lies below the mid-point of the company’s projected view.

Raytheon also raised its 2019 operating cash flow from continuing operations forecast to the band of $4-$4.2 billion from $3.9-$4.1 billion range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Raytheon has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Raytheon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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