ModernGraham Valuation: Raytheon Company (RTN)

moneyCompany Profile (obtained from Google Finance): Raytheon Company together with its subsidiaries, is a technology company specializing in defense, homeland security and other government markets worldwide. The Company provides electronics, mission systems integration and other capabilities in the areas of sensing, effects, and command, control, communications and intelligence systems (C3I), as well as a range of mission support services. It serves both domestic and international customers, principally as a prime contractor on a portfolio of defense and related programs for government customers. The Company operates in six business segments: Integrated Defense Systems (IDS); Intelligence and Information Systems (IIS); Missile Systems (MS); Network Centric Systems (NCS); Space and Airborne Systems (SAS), and Technical Services (TS). On January 31, 2011, the Company acquired Raytheon Applied Signal Technology, Inc. (RAST). Effective June 27, 2013, Raytheon Co acquired Visual Analytics Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $110.35
MG Opinion Fairly Valued
Value Based on 3% Growth $78.94
Value Based on 0% Growth $46.27
Market Implied Growth Rate 4.09%
Net Current Asset Value (NCAV) -$25.66
PEmg 16.69
Current Ratio 1.67
PB Ratio 3.28

Balance Sheet – 9/30/2013 

Current Assets $9,752,000,000
Current Liabilities $5,839,000,000
Total Debt $4,733,000,000
Total Assets $26,778,000,000
Intangible Assets $12,765,000,000
Total Liabilities $17,937,000,000
Outstanding Shares 319,000,000

Earnings Per Share

2013 (estimate) $5.75
2012 $5.65
2011 $5.28
2010 $4.79
2009 $4.89
2008 $3.95
2007 $3.80
2006 $2.46
2005 $2.08
2004 $0.99
2003 $1.29
2002 $1.85

Earnings Per Share – Modern Graham 

2013 (estimate) $5.44
2012 $5.16
2011 $4.80
2010 $4.36
2009 $3.91
2008 $3.17


Raytheon Company is a strong possibility for the Enterprising Investor.  The company does not pass enough requirements in order to be suitable for the Defensive Investor, by not having a strong enough current ratio and trading at a high PB ratio.  However, it is suitable for the Enterprising Investor, as the current ratio is strong enough for that investor type, and the company has a good earnings history and dividend history.  As a result, Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of ModernGraham’s valuation of Boeing.  From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $3.17 in 2008 to an estimated $5.44 for 2013.  This level of demonstrated growth supports the market’s implied growth estimate of 4.09%.  The ModernGraham valuation model returns an intrinsic value of around $110, which is higher than the market’s current price; however, the price is still within the safety margin and would appear to be fair value.

What do you think?  Do you agree that Raytheon Company is fairly valued?  What would be your assessment?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Raytheon Company (RTN) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill





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