No doubt about it. When there's a war on, it's good to be a defense contractor. And when there are two wars on, it's twice as good.

Raytheon (NYSE: RTN) took its turn inviting applause on the investor podium yesterday, taking its place behind General Dynamics (NYSE: GD), Rockwell Collins (NYSE: COL), and Lockheed Martin (NYSE: LMT), each of which has now "beat estimates" for their first-quarter performances. And yet, the applause was long in coming and sparse when it arrived. Here's why.

  • Sales increased 11% year over year in the first quarter.
  • Profits roughly doubled that pace, up 21% to $0.92 per share.
  • As did new orders. Bookings for the quarter shot up 25% -- $6.5 billion in all.
  • Companywide, operating margins expanded 60 basis points to 11.4%, which both improved Raytheon's trend and helped maintain its advantage in profitability over companies like Lockheed, Boeing (NYSE: BA), L-3 (NYSE: LLL), and Northrop Grumman (NYSE: NOC).

And what's wrong with that?
Excellent question. The quarter seems to have gone swimmingly. You'd expect that to translate into at least some increase in stock price rather than the negative response that Raytheon received. But in this Fool's view, there are two issues that kept the stock price grounded.

First, Raytheon was cautious in explaining how the rest of the year might play out. Management only reiterated its previous full-year forecast of $3.65 to $3.80 per share in profits, and sales growth of just 5% to 8%.

On its face, this suggests that Raytheon believes that Q1 was a fluke and that business will slow down later in the year. But as CEO William Swanson later clarified on the conference call, Raytheon is actually just waiting to see what Congress does with its supplemental defense budget; it won't make promises about business it may not receive. If Congress ultimately does cough up the cash, we could well see Raytheon boost its guidance before Q2's results roll around.

Second, maybe we should hope the quarter was a fluke. Raytheon boosted its profitability as a whole, but when broken into pieces, its constituent parts fared worse. Four of Raytheon's business units suffered operating margin declines in Q1, the sole exceptions being missile systems (which held firm at 10.5%) and technical services (where margins leapt to 6.7%).

I attribute that to a lesser burden from pension and corporate costs this year than last, but the fact remains: The performance at Raytheon's individual businesses belies the success of the whole.

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