Here is a look at how Raytheon Company (RTN) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $110.35 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $78.94 |
| Value Based on 0% Growth | $46.27 |
| Market Implied Growth Rate | 4.09% |
| Net Current Asset Value (NCAV) | -$25.66 |
| PEmg | 16.69 |
| Current Ratio | 1.67 |
| PB Ratio | 3.28 |
Balance Sheet - 9/30/2013
| Current Assets | $9,752,000,000 |
| Current Liabilities | $5,839,000,000 |
| Total Debt | $4,733,000,000 |
| Total Assets | $26,778,000,000 |
| Intangible Assets | $12,765,000,000 |
| Total Liabilities | $17,937,000,000 |
| Outstanding Shares | 319,000,000 |
Earnings Per Share
| 2013 (estimate) | $5.75 |
| 2012 | $5.65 |
| 2011 | $5.28 |
| 2010 | $4.79 |
| 2009 | $4.89 |
| 2008 | $3.95 |
| 2007 | $3.80 |
| 2006 | $2.46 |
| 2005 | $2.08 |
| 2004 | $0.99 |
| 2003 | $1.29 |
| 2002 | $1.85 |
Earnings Per Share - Modern Graham
| 2013 (estimate) | $5.44 |
| 2012 | $5.16 |
| 2011 | $4.80 |
| 2010 | $4.36 |
| 2009 | $3.91 |
| 2008 | $3.17 |
Conclusion:
Raytheon Company is a strong possibility for the Enterprising Investor. The company does not pass enough requirements in order to be suitable for the Defensive Investor, by not having a strong enough current ratio and trading at a high PB ratio. However, it is suitable for the Enterprising Investor, as the current ratio is strong enough for that investor type, and the company has a good earnings history and dividend history. As a result, Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of ModernGraham's valuation of Boeing (BA).
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $3.17 in 2008 to an estimated $5.44 for 2013. This level of demonstrated growth supports the market's implied growth estimate of 4.09%. The ModernGraham valuation model returns an intrinsic value of around $110, which is higher than the market's current price; however, the price is still within the safety margin and would appear to be fair value.
What do you think? Do you agree that Raytheon Company is fairly valued? What would be your assessment? Is the company suitable only for Enterprising Investors?
Disclosure: The author did not hold a position in Raytheon Company (RTN) at the time of publication and had no intention of entering into a position within the next 72 hours.
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