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Can Missile Systems Unit Drive Raytheon's (RTN) Q3 Earnings?

Defense major Raytheon Company RTN is scheduled to release third-quarter 2017 results on Oct 26, before the opening bell.

We expect Missile Systems business unit to primarily drive the company’s revenues in the third quarter. Moreover, its overseas business expansion is also expected to boost the quarterly results.  

Let’s take a detailed look at the factors influencing Raytheon’s quarterly results.

Missile Systems Unit – A Key Catalyst

Segment-wise, Missile systems business unit that represent almost 30% of the company’s total business sales continue to be a major growth driver. The third quarter is also poised to benefit from this unit.  Notably, the company won a modification contract worth $615 million for manufacturing 17 Standard Missile-3 (SM-3) Block IIA missiles. Such order wins indicate solid demand for missiles manufactured by Raytheon and in turn is expected to boost sales.

Notably, the Zacks Consensus Estimate for third-quarter sales is $1,980 million for the segment, reflecting year-over-year growth of 13.2%.

Moreover, management earlier announced that it expects an  improvement in this segment’s margin in the second half of the year, starting from the third quarter. In this line, our consensus estimate for operating income of $267 million for this segment reflects an annual improvement of 13.6%; thereby hinting at possible operating margin rise in the to-be-reported quarter.

International Operations: A Major Positive

Apart from its strong forte in domestic front, international business expansion has always been a primary growth driver for Raytheon. The company is currently witnessing strong demand for varied product line not only from Middle East but also from Asia Pacific. In particular, Taiwan, South Korea and Japan have emerged as new abodes for the company’s expansion. Europe also continues to be a major contributor to sales growth. We believe once the company reports third-quarter results, these nations’ contribution to Raytheon’s growth story will become clearer.

Other Contracts to Boost Growth

Like other defense bellwethers, Raytheon also won a number of contracts during the third quarter. Among the orders that Raytheon clinched, the significant ones include a $134-million modification contract for procuring Javelin containerized all-up rounds, command launch units, Javelin vehicle launcher-electronics and associated non-recurring engineering and a $119-million contract to support the Maritime Strike Tomahawk Program. It also won a modification contract of $127 million for procuring Excalibur Precision 155-mm Projectiles.

It goes without saying that these contract wins will boost the company’s third-quarter sales. In line with this the Zacks Consensus Estimate for sales stands at $6.3 billion, reflecting annual growth of 4.9%.

Moreover, during second-quarter earnings call, Raytheon’s management raised its EPS guidance to reflect the company’s improved operating performance alongside expecting the bottom line to grow in the third quarter. In line with this our consensus estimate for Raytheon’s earnings is pegged at $7.90 per share, reflecting annual growth of 6.4%.

Why a Likely Positive Surprise?

Our proven model shows that Raytheon is likely to beat earnings this quarter. Notably, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Raytheon possess both of these attributes, as mentioned below:

Zacks ESP: Raytheon has an Earnings ESP of +0.05%. This is because the Most Accurate estimate is pegged at $1.91, higher than the Zacks Consensus Estimate of $1.90. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Raytheon Company Price and EPS Surprise

 

Raytheon Company Price and EPS Surprise | Raytheon Company Quote

 

Zacks Rank: Raytheon currently carries a Zacks Rank #2, which along with a positive earnings ESP hints at possible surprise prediction.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are some other defense companies you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat this quarter:

Huntington Ingalls Industries, Inc. HII is expected to report third-quarter 2017 results on Nov 8. The company has an Earnings ESP of +2.04% and a Zacks Rank #2.

Leidos Holdings, Inc. LDOS is expected to report third-quarter 2017 results on Nov 2. The company has an Earnings ESP of +3.75% and a Zacks Rank #3.You can see the complete list of today’s Zacks #1 Rank stocks here.

Recent Peer Release

Textron Inc. TXT recently reported third-quarter 2017 adjusted earnings from continuing operations of 65 cents per share, beating the Zacks Consensus Estimate of 62 cents by 4.8%. Total revenues in the quarter were $3.48 billion, which missed the Zacks Consensus Estimate of $3.54 billion by 1.5%.

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