Raytheon Reports Earnings Thursday: Here's What to Look For

By Rich Smith Markets Fool.com

On Thursday morning, before the stock market opens for business, Raytheon Company (NYSE: RTN) will report its financial results -- and this won't be just any old quarterly earnings report, but the one revealing Raytheon's full fiscal 2016 numbers.

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Translation: If you read just one earnings report out of Raytheon this year, this is the one you'll want to catch.

Patriot missile battery. Image source: Raytheon.

What we know so far

So far, we've seen three quarterly earnings reports out of Raytheon. Here's how the numbers look, year-to-date, according to financial data provider S&P Global Market Intelligence -- and relative to what Raytheon reported one year ago, and what analysts have told us to expect this year:

Raytheon Company's...

YTD

Fiscal 2015

Fiscal 2016 (Estimated)

Revenue

$17.8 billion

$23.2 billion

$24.4 billion

Earnings

$1.7 billion

$2.1 billion

$2.2 billion

Free cash flow

$1.4 billion

$2.0 billion

$2.5 billion

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From one perspective, analysts haven't set a particularly high bar for Raytheon's Thursday report. Nearly three quarters of the year's hoped-for revenues are already "in the bag," and more than three quarters of the earnings. If revenues and earnings both grow just 5% relative to the 2015 numbers, Wall Street should be pretty happy.

One thing the Street really would like to see, however -- and the thing that will be hardest for Raytheon to produce -- is big growth in cash profits. Last year, Raytheon generated just $2 billion in free cash flow, which lagged reported earnings. This year, analysts are looking for Raytheon to make up the difference. The hoped-for 25% jump in cash profits to $2.5 billion would eclipse estimated earnings by 14%.

Can Raytheon deliver?

In its third quarter earnings releaseback in October, Raytheon told investors to expect full year revenues of between $22.2 billion and $22.5 billion. Thus, analysts are looking for the company to come in toward the high end of its own prediction for full-year revenues.

Management also told us to expect "earnings per share from continuing operations" of between $7.28 and $7.38 to appear in Thursday's report. Times Raytheon's 293.7 million shares outstanding, this implies earnings of less than $2.2 billion. But Wall Street is expecting the company to max out that prediction -- indeed, the Street almost seems to be expecting an an earnings beat. This suggests investors could be hard to impress when Raytheon reports earnings on Thursday.

The good news is that management's financial outlook for the year -- issued several weeks after Q4 had already begun -- represented an increase in guidance from previous earnings expectations. This suggests that things had already begun looking up by late October. If analysts are looking for an earnings beat Thursday, well, they're being no more optimistic than Raytheon management was itself.

Final point

Despite the fact that Wall Street is looking for Raytheon to produce its greatest improvement in the area of free cash flow, management did not issue any hard and fast guidance regarding free cash flow last quarter. True, Raytheon guided investors to expect operating cash flow of between $2.8 billion and $3.1 billion, but did not specify what kind of capital expenditures it would be making.

So what do we know on that score? Well, we know that Raytheon has invested approximately $500 million in capex over the past 12 months. If it hews close to this trend, then 2016 free cash flow could come in anywhere from $2.3 billion to $2.6 billion. In other words, if Raytheon hits its guidance, it could indeed meet Wall Street's expectations for $2.5 billion in free cash flow.

All that being said, with only $1.4 billion in FCF booked year-to-date, getting the rest of the way to $2.5 billion won't be easy. If Raytheon "misses" on any metric Thursday, I'd put my money on free cash flow being the one where Raytheon comes up short.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.