All year long, defense-contracting heavyweight Raytheon (NYSE: RTN) has made fools (small "f") of Wall Street's best and brightest, beating their earnings estimates with a stick. Thursday morning, it aims to make a clean sweep of fiscal 2007 with yet another outperforming quarterly (and full-year) report.

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts follow Raytheon, which gets nine buy votes, eight holds, and a single sell.
  • Revenue. On average, they expect to see quarterly sales rise 3% to $5.9 billion.
  • Earnings. Profits are predicted to soar 42% to $0.92 per share.

What management says:
October was a busy month for Raytheon's spinmeisters, who had their work cut out for them explaining Q3 results that on the surface seemed vaguely disquieting. While Q3 sales grew a respectable 8% and profits more than twice that, there were some disappointments evident. But for each, Raytheon produced a plausible explanation.

Per-share profits were $0.69, but they would have been higher if not for an after-tax impairment charge connected to Raytheon's to-be-sold Flight Options business. Operating cash flow was basically flat year over year for the quarter, and down significantly for the first nine months of the year, but only because Raytheon had to ante up significant tax payments -- in cash -- giving Uncle Sam his cut on the firm's profit from the selling of Raytheon Aircraft Company (RAC).

What management does:
Those caveats aside, though, Raytheon's going great guns operationally. Sales are up. Margins, too. In fact, gross and operating margins have both been rising steadily over the past 18 months. The net's looking better than ever -- but don't pay too much attention to that, because much of the improvement in the net derives from profits on the RAC sale. Focus instead on operating margins, where you'll find Raytheon lagging defense industry peers like General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT), and Textron (NYSE: TXT), neck and neck with L-3 (NYSE: LLL), and more profitable than either Boeing (NYSE: BA) or Northrop Grumman (NYSE: NOC).

Margins

6/06

9/06

12/06

3/07

6/07

9/07

Gross

17.9%

18.3%

18.4%

18.6%

18.9%

19.4%

Operating

8.9%

9.3%

9.3%

9.6%

10%

10.3%

Net

6%

6.7%

6.3%

6.5%

11.3%

10.9%

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:
This earnings season, I'm running down the "backlog" numbers at all of the major defense contractors, in hopes of finding clues to what their futures might hold. Raytheon gives investors some really good data in this regard, laying out in easy-to-read format its quarterly tally of total backlog, funded backlog, and "bookings" received during the quarter. Here's how these three metrics have been trending, relative to sales:

Q3 2005

Q3 2006

Q3 2007

Funded backlog

$17.4 billion

$18.9 billion

$17.4 billion

Total backlog

$33.1 billion

$34.6 billion

$33.9 billion

Total bookings YTD

$17.5 billion

$17.0 billion

$16.7 billion

YTD revenues

$15.7 billion

$16.6 billion

$15.7 billion

So what we have here is flat sales for the past two years. Funded backlog is also flat, although total backlog is up slightly. And bookings? On the plus side, they're still coming in fast enough to more than replace revenue. But on the minus side, the pace at which new orders are booked has slid for two years running.

Hmm, ominous. I'm beginning to see why many analysts are rating Raytheon a "hold" or "sell." Here's hoping Raytheon can turn these trends -- and investor sentiment -- around with Thursday's report.

Looking for a few good defense companies to invest in? Check out our reports on last week's contestants:

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