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Other Defense Majors Made for Better 2016 Picks Than Raytheon

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Raytheon’s record in expectation management

Raytheon (LMT) has managed to beat consensus EPS (earnings per share) as well as revenue estimates seven times in the last eight quarters. Among defense (XAR) peers, Northrop Grumman (NOC) and General Dynamics (GD) have eclipsed earnings estimates every time in the last eight quarters. Both companies have exceeded revenue estimates six times in the last eight quarters.

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Raytheon’s year-to-date stock performance

Raytheon stock increased from $122.61 at the beginning of January 2016 to $138.01 by July 18, 2016, returning 12.6%. Investors invested in the broader market would have earned a 7.7% return from the S&P 500 Index in the same period.

In the first half of 2016, from January through June, RTN stock rose 10.9%. The S&P 500 index rose 4.3%.

YTD stock returns of peers

Among other defense (PPA) peers, the year-to-date (or YTD) returns of General Dynamics (GD) through July 18, 2016, were poor at 3.6%. The YTD returns of Northrop Grumman (NOC) and Lockheed Martin (LMT) were 17.8% and 20.2%, respectively.

In the first half of 2016, the returns of GD, NOC, and LMT were 2.3%, 18.5%, and 16.4%, respectively.

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Pricing multiples

As of July 18, 2016, the price-to-current-year earnings estimates are at all-time highs of 19.2x, 20.6x, and 21.6x for Raytheon (RTN), Northrop Grumman (NOC), and Lockheed Martin (LMT), respectively.

General Dynamics is the notable exception with its price-to-current-year earnings estimate trading at 14.8x compared to its five-year high of 16.2x in August 2015.

The trailing PE (price-to-earnings) ratios of these companies on July 18, 2016, are as follows:

  • Raytheon is currently trading at a PE ratio of 24.3x, which is near its five-year high in July 2016.
  • Northrop Grumman is trading at a PE ratio of 22.1x, which continues to be its five-year high.
  • Lockheed Martin is trading at a five-year high PE ratio of 21.5x.
  • General Dynamics is trading at a PE ratio of 15.2x, which is lower than its five-year high of 19.5x in November 2014.
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