By now, you've had a few days to digest the results that Raytheon (NYSE: RTN) announced last week. You've read the AP's take on the news, if not Reuters and Marketwatch's. You know that Raytheon beat earnings and sales estimates, that it got some taxes back from the Feds, and upped its guidance for next year. Today, we'll fill in the blanks with the important news that the mainstream media missed, in three parts:

When all else fails, read the instructions
Apparently, it pays to read the entire earnings release. Whodathunkit?

When you think Raytheon, you usually think about things that fly in the sky, rather than rumble on the ground. Patriot missiles, for example. Or the flying laser gun that Raytheon is helping best buds Lockheed (NYSE: LMT), Northrop (NYSE: NOC), and Boeing (NYSE: BA) build. Yet several pages into Raytheon's release, we learn that Raytheon's Network Centric Systems business has received a $150 million order to produce "SATCOM on the Move (SOTM)" communications systems for use on mine-resistant, ambush-protected vehicles operated by the U.S. Army. So in at least a small part, Raytheon's future is tied to the continued success of the Pentagon's MRAP program.

Raytheon is certainly not as dependent on the program as such ground warfare-centric contractors as General Dynamics (NYSE: GD) or Force Protection (Nasdaq: FRPT). Or firms that want to get in the game, like Oshkosh and Ceradyne (Nasdaq: CRDN). But there's some exposure there. Something to keep in mind.

Let backlog be your crystal ball
Raytheon boasted of achieving record backlog of $36.6 billion. As you know, we've been paying special attention to this metric the past few weeks, checking out each of the major defense contractors and how well they're doing at keeping the business flowing. For this purpose, I've updated my figures for where the company stands, and where it stood at year-end in each of the two past years:




Funded backlog

$17.6 billion

$18.2 billion

$20.5 billion

Total backlog

$34.4 billion

$33.8 billion

$36.6 billion

Total bookings

$24.8 billion

$23.0 billion

$25.5 billion


$21.9 billion

$20.3 billion

$21.3 billion

Turns out, Raytheon improved quite a bit in Q4. It generated more bookings relative to sales in 2007 than in any of the past three years. And its backlog -- both funded and total -- is once again on the rise. So if you're disappointed by the failure of Raytheon's 2007 sales to match its levels of two years previous, take heart; the backlog suggests those sales will grow in the future.

Follow the money
Sales are all well and good, of course. But what about profits? You know that Raytheon's "adjusted earnings from continuing operations" amounted to $0.96 in Q4 and $3.31 for full-year 2007. But you also know that when a company "adjusts" its earnings, there's always the potential that it's doing so more for its own benefit (spin) than for yours (clarification.) To de-spin the news, let's take an independent look at the most objective form of profits a company can earn: cash.

Raytheon generated $1.2 billion in operating cash flow last year, about half its 2006 level. That sounds pretty bad, but Raytheon has a reasonable explanation for (much of) the decline. Much of the increase came from a $631 million tax bill that came due on the company's profits from selling off Raytheon Aircraft Co. (RAC). The company also upped its "discretionary" contributions to its pension fund by $700 million compared to 2006. Net out all the one-time items, and I think Raytheon still would have suffered a decline in operating cash flow last year -- but not a 50% cut.

Of course, that still leaves the firm with free cash flow of around just $900 million for the year -- about one-third the firm's 2006 free cash flow. The good news here is that Raytheon expects to generate about $2.1 billion in operating cash flow next year. If we assume that capex remains more or less stable, free cash flow for 2008 will probably approximate $1.8 billion.

Foolish takeaway
Based on last year's free cash flow, Raytheon looks like anything but a bargain. But if you take the firm's predictions about a stronger 2008 at face value -- and the backlog trends suggest you should -- a different picture emerges.

Assuming $1.8 billion in free cash flow this year, Raytheon trades at about 16 times that sum. And if the analysts are right about this firm's ability to grow at 15% per year over the next five years, I'd say the shares are fairly priced.

Not cheap. Not expensive. Just fair.

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Fool contributor Rich Smith owns shares of Force Protection and Ceradyne. Force Protection is a Motley Fool Rule Breakers pick. The Motley Fool has a disclosure policy.