Raytheon Company (RTN) is one of the largest aerospace and defense companies in the United States. It has been benefiting from an increase in demand for the military products it makes under the current administration. And the future continues to look bright, with multiple levers to pull to support top- and bottom-line growth. But is Raytheon a buy? That's tougher to answer than it might seem.
Right products, right time
Raytheon's business operations are divided among four main segments: integrated defense systems (roughly 22% of second-quarter sales); intelligence, information, and services (25%); missile systems (30%), and space and airborne systems (23%). Much of what the company makes and the services it provides are at the leading edge of modern warfare, notably its heavy focus on missiles and missile defense.
Image source: Getty Images.
The company has been doing quite well lately, too, beating revenue and earnings expectations in the second quarter and raising its full-year guidance. Perhaps most exciting about second-quarter results, however, was the company's backlog, which grew to $39.9 billion, a 10% year-over-year increase. The company won 33% more orders in the second quarter of 2018 than it did in the prior-year period. Since that backlog is work that the company has lined up for the future, the outlook is pretty good right now.
So Raytheon has been performing well and its future remains bright. But is it worth buying today? That's a question of valuation. And to paraphrase Benjamin Graham, the father of fundamental analysis, price is what you pay -- value is what you get.
A quick look at the numbers
When thinking about valuation, most investors start with the price-to-earnings ratio. Raytheon's P/E is currently around 24, versus a five-year average around 18.5 -- suggesting that the company is fairly expensive today. That looks even truer when you compare its P/E to some of its largest peers. The only peer with a higher P/E today is Lockheed Martin (LMT -0.27%).
RTN P/E data by YCharts. TTM = trailing 12 months.
That said, earnings are a complicated issue right now because of the changes to U.S. tax laws. Although you should always try to use more than one valuation metric, it's particularly important today. For Raytheon, the same valuation trend shows up with regard to the price-to-sales (P/S) ratio, which looks at the top line instead of the bottom line. Raytheon's P/S ratio is around 2.2, compared with a five-year average of 1.65. This time, however, its ratio is higher than any of its major peers.
RTN P/S ratio data by YCharts.
Looking at the company's assets highlights overvaluation, as well. Raytheon's current price-to-book-value ratio is around 5.3 versus a five-year average of nearly 3.8. To be fair, this is now roughly in line with its largest peers, but the comparison to the five-year average suggests investors are still paying a lofty price for Raytheon today. And when combined with the elevated P/E and P/S, it would be hard to suggest that Raytheon is cheap.
I'd hold off for now
There's no question that Raytheon is doing well, as its recent earnings success shows. And its growing backlog and industry position are good indicators that it will continue to do well over the near term. But key valuation metrics show that investors are well aware of the positives here and have priced in a lot of success -- the aerospace and defense giant looks pricey compared with its own history and its peers. I wouldn't rush to buy Raytheon today.
