'Tis the season for earnings reports, and for defense contractors in particular. All the big names are coming out with their Q2 news -- United Technologies (NYSE:UTX) and Textron reported last week; Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) announce today; Boeing (NYSE:BA), and General Dynamics (NYSE:GD) are on tap for tomorrow; and meanwhile, L-3 (NYSE:LLL) and Raytheon (NYSE:RTN) play rear guard on Thursday. It'll take some time to get to everyone, but we're going to preview 'em all for you right here. Up today: Raytheon.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts follow Raytheon. Eight of them think you should buy the stock, 11 say to hold, and two vote to sell.
  • Revenue. On average, they expect to see quarterly sales of $5.3 billion.
  • Earnings. Profits are predicted to come in at $0.68 per share.

What management says:
CEO William Swanson characterized last quarter's results as a "strong start to the year." Over the course of the year, he anticipates between $21.4 billion and $21.9 billion in revenue; hopes to transform that into $2.85-$3 per share in profits; and plans to replenish essentially all of that revenue with new contracts for future execution.

What management does:
So far, so good. In Q1, Raytheon recorded revenue of $4.9 billion and "solid bookings" of $5.3 billion in new contracts. As for the profitability of that revenue, margins continue to march upwards in lockstep. Each of the rolling gross, operating, and net margins has increased every quarter over the last 18 months.





























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:
Raytheon divides its business into six main segments. Integrated defense systems, missile systems, and space and airborne systems each account for approximately 20% of the company's total revenue; network centric systems provides 18%; intelligence and information systems accounts for 13%; and technical services is responsible for 10%. Fortunately for shareholders, two of the three biggest revenue streams at Raytheon also earn the company the sweetest margins, with integrated defense boasting an 18.2% operating margin last quarter, and space 13.4%. Also good to see, the third best margins are found swimming in the company's fourth biggest revenue stream -- network, with a 12.6% margin.

Trendwise, the biggest risk I see to Raytheon's profits is the fact that, year over year, the number of divisions that earned slimmer operating profits was the same as the number that improved their performance on this metric. Worse, two of the decliners numbered among Raytheon's top three revenue producers -- missile systems, where operating margins contracted 60 basis points, and space, where they came in 80 basis points lighter than last year. Fortunately, the 180-basis-point improvement in integrated defense's margins more than compensated for the profits lost in the other two lead divisions.

Laudable as that improvement is, I don't think investors should count on similar gains in integrated defense. Profit margins as fat as these will almost certainly attract competition, forcing them back down in time. For the sum of Raytheon to continue expanding its margins, its underperforming parts will need to pick up the pace.

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

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.