Are Raytheon’s Earnings a Trend or a Aberration?

by: Matthew Potter
May 5, 2011

Category: Business Line, Companies, Congress, Contract Awards, Department of Defense, development program, Earnings, Events, Federal Budget Process, IT, logistics, Massachusetts, missile defense, production program, Raytheon, Restructuring, Services, States, U.S. Army, U.S. Navy | RSS 2.0

Raytheon (RTN) released its most recent quarterly earnings statement last week and they showed a decline in year-to-year results. While sales were up slightly at $6.06 billion from $6.05 earnings were down fourteen percent. The company also adjusted its yearly projection down to $4.67 to $4.82 from $4.83 to $4.98. Perhaps a little more ominously backlog went down slightly as well.

The question of course is whether this report is a one time aberration or will it signal a trend that due to decreases in U.S. and Western defense spending the big defense contractors are finally going to see contraction in the market. In this quarter Raytheon is able to point to a charge related to a cancelled British homeland defense IT contract but a major contribution was Integrated Defense Systems decline of nine percent in net sales primarily related to an unidentified U.S. Navy program.

In 2010 adjusted earnings per share for the company were up fifteen percent at $5.58 a share. This was after the company made a discretionary payment to their pension plan of $750 million as. For the last quarter of that year net sales were almost $7 billion. The contrast to the first quarter of 2011 is quite stark.

The U.S. will have to begin reducing defense spending soon. The goal of deficit reduction and control of total spending means that the largest discretionary item will have to take some hits. The end of fighting in Iraq and probably return of some troops from Afghanistan will also reduce operating costs. The Defense Department will also begin turning away from systems used in this fighting to investing in new, advanced weapons to face a more conventional threat.

Raytheon because of its focus on missiles, radars and C4I systems should be able to exploit that market. It has stakes in missile defense through the PATRIOT and Navy programs as well as ship and tactical missile systems. It should maintain its share of the pie although how big a pie remains to be split up among contractors remains to be seen.

Photo from Nevada Tumbleweed’s flickr photostream.

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