Writing as The Motley Fool's "defense industry specialist," I'm often asked by readers (who've reviewed my stock holdings): "Hey! If you're the defense guy, why don't you own any defense stocks?"

Which is an excellent question.

The answer is that, while I love researching, reading, and writing about defense stocks for The Motley Fool, I don't like buying defense stocks unless they are cheap -- and they aren't always cheap. That said, sensible of the concern, I did recently pick up stock in one defense company: Raytheon (NYSE:RTN). I didn't buy a lot of shares -- just enough to put some "skin in the game." I hope not so many shares that they will skew my judgment too greatly when writing about the stock for the benefit of you, my fellow investors.

Did I succeed? You be the judge. Because as luck would have it, Raytheon just reported its full-year 2014 earnings. Here's my read on them:

  • Sales shrank 4% at Raytheon in 2014, falling to $22.8 billion.
  • Cost-cutting at the company nevertheless permitted Raytheon to expand its operating profit margin by 150 basis points, to 13.9%.
  • Result: Operating profits grew 8%, which, combined with a smaller tax bill, permitted Raytheon to report net profits of $2.2 billion for the year. That was up 12% year over year.
  • Reductions in share count, meanwhile, resulted in Raytheon earning $7.18 per diluted share -- a 17% improvement year over year.

Meanwhile, Raytheon painted a bright picture for the year to come, noting that with $7.1 billion in new orders coming in over the course of Q4, and $24.1 billion added over the course of the year, the company continued to experience a positive "book-to-bill ratio." This essentially means that the company is bringing in orders for new business even faster than it bills customers for existing sales -- foreshadowing accelerating sales growth in future quarters.

Not all news is good
That's the good news. The bad news is that despite all the new bookings, Raytheon's backlog of business to be done at the end of 2014 was essentially unchanged from where it stood at the end of 2013 -- about $23.1 billion in funded backlog; about $33.6 billion in total backlog. And, of course, this tends to undermine the thesis that "things are looking up." Actually, they're looking pretty much the same as they looked a year ago.

What's more, despite improving earnings, and even more improvement in earnings per share in 2014, Raytheon nonetheless experienced declining cash production. Free cash flow for 2014 was only $1.7 billion -- a 17% decrease in comparison to 2013 results. (Raytheon blamed the need to make a $600 million "discretionary cash contribution to the Company's pension plans" in Q4 for the shortfall.)

What it all means to investors
Guiding investors on what to expect in the coming year, Raytheon management says that, despite the good book-to-bill ratio, sales will probably dip further in 2015 -- perhaps as low as $22.3 billion, which would make for a 2% decline. Profits, too, will be down, with earnings from continuing operations projected to range from $6.20 to $6.35 per share. (On the plus side, cash flow may pop back up after being depressed by 2014's pension contributions.)

Taking Raytheon's news as a whole, investors seem uninspired, bidding the shares down by more than 4% in Thursday trading -- and I can't say I blame them.

Priced today at 14.1 times trailing earnings, 16.4 times the low end of 2015 earnings estimates, and 18.4 times trailing free cash flow, Raytheon shares today look significantly more expensive than when I bought them several months ago. With analysts projecting sub-10% earnings growth over the next five years, and the dividend yield only 2.3%, I'm personally not seeing a lot of value in the shares at today's prices.

Or put another way: I may own Raytheon shares. But I won't be buying any more shares today.