Close, but no cigar. That's one way to sum up Raytheon's (NYSE:RTN) fiscal year 2016.

We laid out the expectations for Thursday's earnings report for you earlier this week. According to Wall Street's best guesses, Raytheon was supposed to report earning $2.2 billion in profit on $24.4 billion in revenue, and generate even more cash profit than it was allowed to report as "net income" under GAAP -- $2.5 billion in positive free cash flow, to be precise.

A tomahawk cruise missile soaring over the ocean

Raytheon makes the highly accurate Tomahawk cruise missile -- but now its own stock is a target. Image source: Raytheon.

And what did Raytheon actually report?

The news

For fiscal 2016, Raytheon reported:

  • 4% sales growth, hitting $24.1 billion (a miss)
  • 7% improvement in earnings from continuing operations -- $2.2 billion (a hit)
  • Free cash flow of only $2.3 billion, which was 21% better than it reported in 2015 but still fell short of Wall Street estimates.

Tally up those results and it looks like Raytheon achieved analysts' earnings goal, but missed on both sales and free cash flow. What may be even worse is that, on a per-share basis, analysts were looking for Raytheon to report $7.46 in net profit, whereas the company actually only earned $7.44. So depending on how you look at it, Raytheon either went 1-for-3 on estimates -- or 1-for-4.

The reaction to the news

Whichever way you look at it, though, investors don't seem to have been pleased with the results, and they sold off Raytheon shares by 2.7% in response to the news. It probably didn't help matters that the guidance Raytheon issued in conjunction with its earnings release fell broadly short of expectations for 2017.

Already, Yahoo! Finance estimates had investors looking for almost no earnings growth in this new year, with profits coming in just pennies ahead of 2016's numbers -- $7.50 per share -- despite expectations that sales would grow by better than 5%. Raytheon's new guidance, however, shows revenues rising less than expected -- anywhere from $24.8 billion to $25.3 billion, so about 5% growth. Profits, says the company, will be no more than $7.35 (a decline from 2016 profits). Finally, free cash flow should range between perhaps $2.3 billion and $2.6 billion (assuming capex of $500 million or thereabouts).

So is Raytheon a buy or not?

Between the "earnings miss" in 2016 and the weak guidance for 2017, investors could be forgiven for shying away from Raytheon stock right now. But the news isn't all bad. Despite a constrained defense spending environment, Raytheon is growing revenue and generating plenty of profit. The company took in a "record" $27.8 billion in orders for new work last year, giving it a book-to-bill ratio of 1.16 for the year, and growing the size of its backlog by 6%. This promises even more growth in quarters to come as those new orders get fulfilled and converted into revenue -- and profit.

Really, based on what I'm seeing in this report, I have no qualms about the health of Raytheon's business. What concerns me is simply the valuation of Raytheon stock.

After Thursday's sell-off, Raytheon is now valued at $42 billion in market capitalization. Weighed against $2.2 billion in profits, that gives the stock a P/E ratio of 19.1. Weighed against free cash flow of $2.3 billion, the price-to-free cash flow ratio is 18.3.

Neither of these numbers looks particularly attractive in light of S&P Global Market Intelligence estimates that Raytheon will grow earnings at only 6% annually over the next five years. And with Raytheon itself projecting an earnings decline in 2017 -- well, look out below. Thursday's sell-off could be only the beginning of the bad news for Raytheon stock.