Will Missile Deals Drive Raytheon's (RTN) Earnings In Q4?

Raytheon Company (NYSE:RTN) is scheduled to release fourth-quarter and full-year 2017 results on Jan 25 before the opening bell.

We expect the Missile Systems business unit of the defense major to primarily drive the company’s revenues in the quarter. Moreover, its overseas business expansion is also expected to boost results.

Let’s take a detailed look at the factors influencing Raytheon’s quarterly results.

Missile Systems Unit Driving Growth

Segment-wise, Missile systems business unit that represent almost 30% of the company’s total business sales continues to be a major growth driver. The fourth quarter is also poised to benefit from this unit. Notably, the company won a modification contract worth $300 million for supplying Tube-launched Optically-tracked Wireless-guided missiles and another modification contract worth $304.2 million to procure 618 Joint Standoff Weapon (JSOW) air-to-ground missiles, containers, component parts/support equipment (spares) and engineering technical assistance. Moreover, at the end of the year the company won a $634.2-million deal for manufacturing the 31st Lot of Advanced Medium-Range Air-to-Air Missile. Such order wins indicate solid demand for missiles manufactured by Raytheon and in turn is expected to boost sales.

Notably, the Zacks Consensus Estimate for fourth-quarter sales is pegged at $2,219 million for the segment, reflecting year-over-year growth of 17.1%.

In fact, buoyed on this segment’s double-digit sales growth, our consensus estimate for fourth-quarter sales is pegged at $6.83 billion for Raytheon. This represents an annual improvement of 9.6%.

For 2017, the company expects to witness sales growth of 10% for the Missile Systems unit, driven by higher sales volume.

International Operations: A Major Positive

Apart from its strong forte in domestic front, international business expansion has always been a primary growth driver for Raytheon. Japan having pursuing missile defense solutions to protect its homeland, has created growth opportunities for Raytheon. The company is currently co-producing SM-3 Block IIA missiles with Japan. Moreover, Raytheoncontinues to make progress on several large Patriot opportunities in Europe, while in the Middle East the company is additional demand signal for early warning sensing and missile defense products. We believe once the company reports fourth-quarter results, these nations’ contribution to Raytheon’s growth story will become clearer.

Other Factors to Consider

Apart from its strong forte in missile defense, the company also enjoys a leading position in offering cybersecurity, particularly on the domestic front. Notably, at the onset of the fourth quarter, the Government Accountability Office dismissed the protest surrounding the Domino contract worth $1 billion and Raytheon is now actively working with the Department of Homeland Security on this largest single cybersecurity contracts ever awarded. We may expect further gains from this contract to get reflected in the company’s fourth-quarter sales.

Such a steady contract securing expectation led the company to increase its 2017 booking outlook by $500 million. The company also enhanced its 2017 sales outlook, citing solid expectations for fourth-quarter results.

In line with this the Zacks Consensus Estimate for sales is $25.4 billion, reflecting annual growth of 5.8%.

The company also raised its 2017 earnings outlook. In line with this the Zacks Consensus Estimate for 2017 earnings is at $7.61, reflecting annual growth of 0.8%.

What the Zacks Model Unveils?

Our proven model show that Raytheon is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Zacks ESP: Raytheon has an Earnings ESP of +0.08%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Raytheon currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are a few stocks in the Aerospace and Defense space worth considering on the basis of our model which shows that they have the right combination to pull off a beat:

Huntington Ingalls Industries, Inc. (NYSE:HII) is expected to report fourth-quarter 2017 results on Feb 15. The company has an Earnings ESP of +3.43% and Zacks Rank #2.

General Dynamics Corp. (NYSE:GD) is expected to report fourth-quarter 2017 results on Jan 24. The company has an Earnings ESP of +0.19% and Zacks Rank #2.

Lockheed Martin Corp. (NYSE:LMT) is expected to report fourth-quarter 2017 results on Jan 29. The company has an Earnings ESP of +0.31% and Zacks Rank #2.

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