Raytheon Company (RTN) Quarterly Valuation – March 2014

500px-Raytheon.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Raytheon Company fares in the ModernGraham valuation model.

Company 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.

RTN Chart

RTN data by YCharts

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

Key Data:

Recent Price $98.65
MG Value $114.73
MG Opinion Fairly Valued
Value Based on 3% Growth $79.95
Value Based on 0% Growth $46.87
Market Implied Growth Rate 4.70%
Net Current Asset Value (NCAV) -$16.24
PEmg 17.89
Current Ratio 1.69
PB Ratio 2.82

Balance Sheet – 12/31/2013

Current Assets $9,816,000,000
Current Liabilities $5,810,000,000
Total Debt $4,734,000,000
Total Assets $25,967,000,000
Intangible Assets $12,764,000,000
Total Liabilities $14,932,000,000
Outstanding Shares 315,000,000

Earnings Per Share

2013 $5.96
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

Earnings Per Share – ModernGraham

2013 $5.51
2012 $5.16
2011 $4.80
2010 $4.36
2009 $3.91
2008 $3.17

Dividend History

RTN Dividend Chart

RTN Dividend data by YCharts

Conclusion:

Raytheon Company is suitable for the Enterprising Investor but not the Defensive Investor.  The company does not satisfy the Defensive Investor’s current ratio requirement or the PB ratio requirement, but the only requirement it does not satisfy for the Enterprising Investor is the debt level relative to current assets.  As a result, Enterprising Investors interested in following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Boeing Company (BA) and 5 Low PEmg Companies for the Defensive Investor.  From a valuation side of things, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $3.91 in 2009 to $5.51 in 2013.  This solid level of demonstrated growth supports the market’s implied estimate of 4.7% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Raytheon Company (RTN)?  Where do you see the company going in the future?  Is there a company you like better?  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) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.


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