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Raytheon Company (RTN) Q2 Earnings: A Beat in the Cards?

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Defense prime, Raytheon Company (RTN - Free Report) is scheduled to release second-quarter 2017 results on Jul 27, before the opening bell.

In the prior quarter, the company reported a positive earnings surprise of 7.45%. It is worth noting that Raytheon outperformed the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 5.16%.

Let’s see how things are shaping up for the company prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Raytheon is likely to beat earnings because it has the right combination of the two key ingredients.

Zacks ESP: Raytheon has an Earnings ESP of +0.58%. This is because the Most Accurate estimate stands at $1.75, higher than the Zacks Consensus Estimate of $1.74. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Raytheon carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates.

Notably, 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.

Meanwhile, Raytheon’s combination of a Zacks Rank #3 and +0.58% ESP makes us reasonably certain of an earnings beat.

Raytheon Company Price and EPS Surprise

Raytheon Company Price and EPS Surprise | Raytheon Company Quote

What’s Driving the Better-Than-Expected Earnings?

Raytheon continues to retain its position as one of the large-cap defense giants in the U.S., thanks to its non-platform-centric focus. Strong demand for the company’s advanced combat-proven defense technologies from global customers as well as solid domestic bookings hint at an encouraging yet-to-be-reported quarter.

Among the highlights of the second quarter, Raytheon clinched a few significant contracts, including a $200 million modification contract for procuring 317 of the 17th Lot of AIM-9X Block II missiles and a $113.2 million contract to supply engineering and technical services for Standard Missile to the U.S. Navy. Another notable one is the $617.6 million worth Navy deal to procure full-rate production requirements and spares for fiscal 2017 Standard Missile-2 (SM-2).

On May 20, President Trump signed an arms deal worth $110 billion with Saudi Arabia – an agreement that came up with a potential value of $350 billion over 10 years. Although no contract value was released, as part of this arms package, Raytheon has signed a memorandum of understanding (MOU) with the Saudi Arabia Military Industries Company to cooperate on defense-related projects and technology development.

Also, the company will establish Raytheon Arabia – a wholly owned Saudi legal entity – to administer programs for creating indigenous defense, aerospace and security capabilities in the KSA. With the U.S. Department of State indicating a possible adoption of Raytheon’s Patriot missile system by Saudi Arabia, this arms deal is expected to boost the company’s sales growth in the days ahead.

The company expects to generate sales in the range of $6.05–$6.20 billion. On the bottom-line front, management projects earnings in the band of $1.67–$1.71 per share.

Moreover, the company expects the tax rate to be approximately 29.5% in the to-be-reported quarter, which will be lower than the full year’s projected rate, owing to the timing of the benefit associated with stock-based compensation.

However, management expects to record a non-operating charge associated with the make-whole provision related to the early retirement of debt. This pre-tax charge of approximately $40 million will impact the quarter’s EPS by 9 cents.

For the second quarter, the Zacks Consensus Estimate for earnings is pegged at $1.74 a share, reflecting a decrease of 0.57% year over year, while the consensus for revenues is $6.23 billion, implying a 3.17% year-over-year rise.

Other Stocks that Warrant a Look

Here are some other defense stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

General Dynamics Corp. (GD - Free Report) is expected to report second-quarter 2017 results on Jul 26. The company has an Earnings ESP of +0.41% and a Zacks Rank #3.

Spirit Aerosystems Holdings, Inc. (SPR - Free Report) is expected to report second-quarter 2017 results on Aug 2. The company has an Earnings ESP of +1.65% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntington Ingalls Industries, Inc. (HII - Free Report) is expected to report second-quarter 2017 results on Aug 3. The company has an Earnings ESP of +4.96% and a Zacks Rank #2.

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