Morningstar | RTN Updated Forecasts and Estimates from 12 Feb 2019
Raytheon is one of five major U.S. defense contractors left standing after a wave of mergers during the 1990s and early 2000s consolidated the industry. The company operates five segments: integrated defense systems; missile systems; space and airborne systems; intelligence, information, and services; and Forcepoint. IDS specializes in radars and missile defense; MS produces munitions and missiles; and IIS focuses on services, offering training, engineering, and logistics. The Forcepoint business focuses on cybersecurity for government and commercial customers. Raytheon's returns lagged its cost of capital in the early 2000s due to a hangover from a spate of mergers and acquisitions in the late 1990s. However, management has refocused on operations and contained costs. Raytheon improved its segment operating margins to 12% in 2018 from 7% in 2004. Return on invested capital, furthermore, exceeded the cost of capital even as revenue fell to $22.8 billion in 2014 from $24.8 billion in 2011. After shrinking from 2011 to 2014, Raytheon is now growing and posted accelerating year-over-year revenue growth revenue each year from 2015 to 2018. Increased geopolitical instability has translated into international sales, which account for over 30% of revenue, and U.S. defense spending is also increasing under the Trump administration. We think Raytheon's venerable Patriot system and its strong position in missiles and radars will continue to help it win contracts. Its fledgling cybersecurity business, Forcepoint, accounts for less than 3% of sales, but Raytheon spent about $2 billion on acquisitions to build it. Forcepoint is in rebuilding mode after a poor 2017 performance.We expect the company to continue growing from 2019 through 2023; we forecast approximately 5% annual average revenue growth over this period combined with double-digit earnings per share growth through 2021. We think the company's wide moat confers durable competitive advantages, which we expect to translate into returns above the cost of capital for years to come.Raytheon, together with its subsidiaries, is a technology company, focused on defense and other government markets. The company has five segments: Integrated Defense Systems, which is engaged in integrated air and missile defense; large land- and sea-based radar solutions; command, control, communications, computers, cyber and intelligence solutions; Intelligence, Information and Services, which provides technical services to intelligence, defense, federal and commercial customers; Missile Systems, which produces missile and combat systems; Space and Airborne Systems, which develops integrated sensor and communication systems for missions; and Forcepoint, which develops cybersecurity products.
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