Raytheon Co Valuation – February 2016 $RTN

Benjamin 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 or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016.  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 stock analysis showing a specific look at how Raytheon Co (RTN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Raytheon Company, together with its subsidiaries, is a technology Company that specializes in defense and other Government markets. The Company develops products, services and solutions in markets: sensing; effects; command, control, communications and intelligence (C3I); and mission support, as well as cyber and information security. The Company operates in four segments: Integrated Defense Systems (IDS); Intelligence, Information and Services; Missile Systems, and Space and Airborne Systems. The Company serves both domestic and international customers, as both a prime contractor and subcontractor on a portfolio of defense and related programs primarily for Government customers. The Company’s products include Global Integrated Sensors, Integrated Air & Missile Defense, Cybersecurity and Special Missions, Global Training Solutions, Land Warfare Systems, Advanced Missile Systems, Tactical Airborne Systems, Advanced Missile Systems and Electronic Warfare Systems.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of RTN

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $36,554,548,276 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.60 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 42.74% Pass
6. Moderate PEmg Ratio PEmg < 20 18.07 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.67 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.60 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.45 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

RTN value chart February 2016

EPSmg $6.73
MG Growth Estimate 4.50%
MG Value $117.81
Opinion Fairly Valued
MG Grade B-
MG Value based on 3% Growth $97.64
MG Value based on 0% Growth $57.24
Market Implied Growth Rate 4.78%
Current Price $121.68
% of Intrinsic Value 103.28%

Raytheon Company is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, and the high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $5.18 in 2012 to an estimated $6.73 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 4.78% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. Raytheon Company performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

RTN charts February 2016

Net Current Asset Value (NCAV) -$30.61
Graham Number $72.06
PEmg 18.07
Current Ratio 1.60
PB Ratio 3.67
Dividend Yield 2.20%
Number of Consecutive Years of Dividend Growth 12


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Most Recent Balance Sheet Figures

Balance Sheet Information Dec2015
Total Current Assets $9,812,000,000
Total Current Liabilities $6,126,000,000
Long-Term Debt $5,330,000,000
Total Assets $29,281,000,000
Intangible Assets $14,731,000,000
Total Liabilities $19,153,000,000
Shares Outstanding (Diluted Average) 305,200,000

Earnings Per Share History

Next Fiscal Year Estimate $6.86
Dec2015 $6.80
Dec2014 $7.18
Dec2013 $6.16
Dec2012 $5.65
Dec2011 $5.28
Dec2010 $4.88
Dec2009 $4.89
Dec2008 $3.92
Dec2007 $5.79
Dec2006 $2.85
Dec2005 $1.92
Dec2004 $0.94
Dec2003 $0.88
Dec2002 -$1.59
Dec2001 -$2.12
Dec2000 $0.41
Dec1999 $1.17
Dec1998 $2.46
Dec1997 $2.18

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.73
Dec2015 $6.52
Dec2014 $6.20
Dec2013 $5.59
Dec2012 $5.18
Dec2011 $4.95
Dec2010 $4.68
Dec2009 $4.34
Dec2008 $3.74
Dec2007 $3.26
Dec2006 $1.66
Dec2005 $0.71
Dec2004 -$0.03
Dec2003 -$0.42
Dec2002 -$0.69
Dec2001 $0.11
Dec2000 $1.23

Recommended Reading:

Other ModernGraham posts about the company

10 Best Stocks For Value Investors This Week – 10/31/15
The 16 Best Stocks For Value Investors This Week – 8/1/15
Raytheon Company Analysis – July 2015 Update $RTN
Raytheon Corporation Quarterly Valuation – April 2015 $RTN
58 Companies in the Spotlight This Week – 1/31/15

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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