Company Overview
Raytheon is a major United States defense contractor with nearly $25 billion in annual sales that operates through six segments: integrated defense systems, intelligence and information, missile systems, network-centric systems, space and airborne systems, and technical services. Sales to the U.S. government account for more than 88% of the company’s total sales. Waltham, Mass., based Raytheon employs 75,000 people.
Morningstar View
Morningstar initiated credit coverage of Raytheon with an issuer rating of A. Raytheon’s good Business Risk rating reflects the company’s status as one of the world’s largest defense contractors and narrow economic moat. The firm’s broad array of contracts, with none more than 5% of sales, limits its exposure to specific program cuts as the Defense Department reviews its spending priorities. Further, Raytheon has been very successful penetrating the international markets, which now represent about 20% of sales. We expect the firm to continue to generate double-digit growth internationally, which will offset weak domestic growth and result in mid-single-digit growth in sales over our forecast horizon.
Risks
- Raytheon depend on the U.S. Government for a substantial portion of their business and changes in government defense spending could have consequences on their financial position, results of operations and business. Approximately 88%, or $22 billion, of Raytheon’s 2009 revenue was from the U.S. government.
- Their international business is subject to geo-political and economic factors, regulatory requirements and other risks. Sales of their products outside of the U.S. require U.S. Government authorization and such authorizations may be delayed or withheld.
- The company enters into fixed-price and other contracts which could subject them to losses in the event that they experience cost growth that cannot be billed to customers.
- Raytheon use estimates in accounting for many of their programs and changes in those estimates could adversely affect their future financial results.
- Management use estimates and assumptions in accounting for pension and other benefit plans, which are evaluated and updated on an annual basis. Changes in key estimates and assumptions, such as discount rates and assumed long-term return on assets (ROA), as well as the actual investment returns on the company’s pension plan assets and other actuarial factors could affect earnings, equity and pension contributions in future periods.
- The group have made, and expect to continue to make, strategic acquisitions and investments, and these activities involve risks and uncertainties.
- Goodwill and other intangible assets represent a significant portion of their assets and any impairment of these assets could negatively impact the results of operations.
- The outcome of litigation in which they have been named as a defendant is unpredictable and an adverse decision in any such matter could have a material adverse effect on their financial position or results of operations.
Fundamentals
Profitability
Cash Flow
Financial Health
Yields
Valuation
Whilst this is a brief introduction into the factors I consider before making an investment decision, the second part, which I will include on the blog tomorrow, will focus specifically on the valuation side of things, in addition to the exact details of the Put Option Investment strategy I adopted.
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