Now that Christmas is out of the way, it's time for that other "most wonderful time ... of the year" -- year-end earnings season, when those companies whose fiscal years align sensibly with the calendar version report their Q4 and full-year results. Next up is Raytheon (NYSE:RTN), which reports bright and early Thursday morning.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts still follow Raytheon. Four of them say you should buy the stock; 16 say hold; and there's one sell.
  • Revenues. On average, they expect to see quarterly sales drop 10% to $5.6 billion.
  • Earnings. Profits are expected to grow 5% to $0.65 per share.

What management says:
Raytheon turned in a bit of a mixed back of earnings news when last we heard from it, three months ago. Exceeding analysts' profits expectations, it fell short on sales. Looking forward, however, Raytheon raised guidance for full-year bookings, sales, and profits. Finally -- and perhaps most importantly -- Raytheon's operating cash flow weakened year over year in the third quarter, and although the firm raised guidance for next quarter's operating cash flow, it warned that 2007's numbers could be as much as 25% lower.

What management does:
So far this year, both operating and free cash flow are down noticeably in comparison with the first three quarters of 2005. Meanwhile, from a GAAP point of view, things are still going swimmingly. Rolling gross margins are on a three-quarter-long winning streak, and rolling operating and net margins have both been climbing for well over a year.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

16.8%

16.8%

16.7%

17.1%

17.4%

17.8%

Operating

7.6%

7.8%

7.8%

8.1%

8.4%

8.8%

Net

3.6%

3.9%

4.0%

4.5%

4.9%

5.2%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
One thing worries me about those rising margins: Over the last two quarters, at least, their rise has owed more to a decline in the cost of goods sold (COGS) than to improvements in efficient generation of profits (as you might have guessed from the firm's targeted level of returns on capital, which is in the single digits). Year over year, sales for the last two quarters are up 6% on average, while COGS has risen only 4%. The resulting expansion in gross margins passes almost entirely down to the bottom line.

However, it's getting no help along the way. In addition to the research and development spending (that I praised last quarter), which outpaced sales gains 8% to 6%, selling, general, and administrative spending also rose 8% during the period. These rising operating costs are therefore keeping Raytheon's margins from being quite as high as they might have become. But a company can't depend on raw materials costs declining forever -- ultimately, to keep margins expanding, it must control its operating costs as well. Otherwise, margins will stagnate as input costs stabilize.

Competitors:

  • Boeing (NYSE:BA)
  • Embraer (NYSE:ERJ)
  • Honeywell (NYSE:HON)
  • L-3 (NYSE:LLL)
  • Northrop Grumman (NYSE:NOC)
  • Rockwell Collins (NYSE:COL)

Interested in Raytheon? Read about its plans to protect airliners from terrorists in:

Embraer is a Motley Fool Stock Advisor pick. You can find out why with a 30-day free trial of the newsletter.

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy wants to be an Air Force ranger.