RTN Raytheon Co

By Doug Cameron 

U.S. defense contractors are enjoying a turnaround year.

Raytheon Co. on Thursday reported higher quarterly profits and raised its full-year earnings guidance, marking a clean sweep of improved outlooks among the four largest defense companies. The forecasts have pushed share prices to record highs in recent weeks.

Rising military budgets in the U.S. and overseas as well as cost cuts have made 2016 a banner year for defense companies as revenue starts to climb after four years of flat or declining sales.

Companies are also continuing to funnel cash back to investors who viewed defense as more resilient than diversified industrial companies more exposed to the slowdown in emerging markets.

Raytheon joined larger peers including Lockheed Martin Corp. and Northrop Grumman Corp. in raising its profit expectations for the year as conflicts in the Middle East boosted demand for bombs, missiles and intelligence services

Improving prospects for the defense unit of Boeing Co. accounted for half of the aerospace giant's own boost this week to 2016 profit expectations, excluding the latest charge against problems building a new Air Force tanker.

Raytheon has the biggest exposure among U.S. defense companies to overseas sales, with exports accounting for almost a third of revenue. While the slide in oil prices had slowed down the pace of some new orders in the Middle East earlier this year, Raytheon said deals for sophisticated equipment such as missile defense systems continued apace.

"We are very bullish on international sales," Raytheon Chief Financial Officer Toby O'Brien said in an interview. He said half the growth in its missiles business this year stems from the U.S. and allies replenishing stocks depleted by the multiple conflicts in the Middle East.

Rising profits and buybacks have helped defense stocks outperform the broader market and outweighed concerns over some problematic military programs such as Boeing's tanker and a new GPS ground station being developed by Raytheon that is late and over budget.

U.S. defense stocks are up 12% so far this year compared with a 4% rise in the broader market, according to RBC Capital. Lockheed Martin, the world's largest defense company by sales, leads the pack with a gain of almost 17%.

Raytheon reported net profit of $704 million for the second quarter, compared with $503 million a year earlier, with per-share earnings rising to $2.38 from $1.65 as sales rose 3% to $6 billion. All four units at the maker of Patriot missile-defense systems and Paveway laser-guided bombs reported higher profits, including its Forcepoint cybersecurity business.

Raytheon maintained its forecast for revenue to climb to between $24 billion and $24.5 billion in 2016 -- compared with $23.2 billion last year -- but lifted per-share profit guidance by 20 cents to $7.13 to $7.33.

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

July 29, 2016 02:48 ET (06:48 GMT)

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