Raytheon Company's (RTN +0.00%) stock is up around 30% so far in 2017. That advance has been driven by a generally rising market, a string of solid, year-over-year top-line gains, and a portfolio that looks well positioned to benefit from the future military spending needs of the U.S. government and its allies. But is this military supplier and contractor a buy at these price levels? Here's a few statistics you need to think about before pulling the trigger.
Just the facts...
I'm not going to pass judgement about Raytheon as a company. It does a good job, overall, at what it does (largely providing high-tech military hardware and services). And with long-term debt at just 30% (or so) of the capital structure, there's no particular need to worry about its balance sheet.
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But being a good company doesn't make Raytheon a good investment option today. Even the best company bought at too high a price can turn into a terrible investment, which is where valuation comes into play. And on that score, investors should tread carefully with Raytheon.
For example, Raytheon's trailing price to earnings ratio is currently 25. That compares to its five-year average PE of around 15. In fact, Raytheon's PE is even higher than that of the S&P 500 Index (around 22) at this point. To be fair, that's not out of line with peers -- Lockheed Martin (LMT 0.36%), for example, also boasts a PE over 25, well above its five-year average of roughly 16. But the PEs of both of these military contractors are at their highest levels in more than a decade. That's a concerning trend.
But PE isn't the only metric to worry about. Price to sales is also out of whack, trending at its highest point since the turn of the century. Raytheon's PS ratio is currently at 2.2 compared to a five-year average of around 1.2. That 2.2 is well outside the normal range at which Raytheon's PS ratio has trended for the last 17 years. The previous peak, which occurred about a decade ago, was around 1.3. That means the current PS ratio is about 66% higher than its previous high water mark, and it's higher than Lockheed's 1.9 PS ratio.
RTN PE Ratio (TTM) data by YCharts
Then there's the similarly troubling price to book ratio. This metric stands at roughly 4.9 today versus a five-year average of 2.9 -- a roughly 66% difference here as well. The price to book for the S&P 500 is around 3.1. Again, Raytheon's PB ratio is higher than it's been since before we were all worried about the Y2K issue.
Now take a look at Raytheon's dividend yield, which is around 1.7%. Its five-year average yield is 2.5%. The yield is at the low end of the company's historical range and near the lowest point it's seen in roughly a decade. To look at this a different way, Raytheon's yield is roughly 30% below its five-year average, which is about the mismatch at Lockheed, as well.
The takeaway
When you look at these valuation metrics, Raytheon appears expensive across the board (as does peer Lockheed Martin). Most investors would be better off avoiding the stock today. That's not to suggest that Raytheon is a bad company, which is hardly the case -- but if you pay to much for a good company it can turn into a bad investment. Raytheon's valuation suggests it would be bad investment today.
