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The company under evaluation is Raytheon Company which deals with the provision of products and services in the areas of defence and commercial electronics business and special mission aircraft for both government and commercial customers. The products include the ground-based air defence missile systems, the ground-based phased array radar and the command, control and communication systems. Other products include the Bunker Buster bombs, Tomahawk and Patriot missiles.
The current share price is $59.26594 within a days range and the volume of traded shares are three million seven hundred and seventy-six thousand two hundred and seventy-seven. The change in the traded shares currently as compared to the previous close is approximately 1.89%. The market capitalization is twenty-four billion US dollars while the price to earnings ratio (P/E) is nine point five points.
The current earning per share (EPS) which is the amount of profit that can be attributed to each share out of the sum total of the profits that the company has made is 5.97. The earning per share is vital because it shows the investors willing to pay for a specific stock in terms of dollar earnings. The current Price to Earnings ratio also called the P/E ratio currently can be computed by dividing the share price by the earning per share, that is, share price/earning per share.
Hence the current Price to earnings ratio is 59.26/5.97 = $9.93.The Price to Earnings Ratio (P/E) is a valuation of the company’s share price currently as compared to its earnings per share. The two ratios are quite important in the company as they assist in fundamental stock analysis because they indicate when the stocks are to be bought and the time when it is to be bought. The company will also use the figures from the two ratios to arrive at a decision as to when to sell its stock.
The price/earnings ratio (P/E) which is also called the multiple is a fundamentalist toolbox and the figure is the most popular used in the analysis of the stock market. The ratio is helpful in the company as it indicates whether the stock is a bargain or it is overpriced. The current year dividend per share is 1.12 which is the profits and earnings of a corporation that is appropriated and distributed among the shareholders and the dividend yield is 1.90%. The target estimation is 70.92 for a period of one year.
The next year’s forecast for dividend per share is 1.26 while the subsequent year dividend per share is projected to be 1.38. However, in spite of the forecast offered by the statistics my forecast will be the average of the current dividend per share and projected dividend per share for next year. Hence the figure will be (26+1.12)/2 = (2.38)/2 = 1.19. If the long term annual growth of the company is 3%, then the investors will be looking for D1/(1+r)1 + D2/ (1+r)2 + D3/(1+r)3 + D4/ (1+r)4 +
This means that 1.12/ (1+0.03) + 1.26/(1+ 0.03)2 +1.38/ (1+0.03)3 = 1.12/1.13 + 1.26/ (1.03)2 + 1.38/ (1.03)3 = 0.991 + 1.1876+ 1.2629= 3.4415, the investors will be looking for a return of 3.4415 If the investors decide to an annual return of 12% on this share this means that
D1/ (1+r)1 + D2/ (1+r)2 + D3/(1+r)3 + D4/(1+r)4 = 1.12/(1+0.12) + 1.26/(1+0.12)2 + 1.38/(1+0.12)3 1.12/1.12 + 1.26/ (1.12)2 + 1.38/ (1.12)31+ 1.004464+ 0.9823 = 2.9867. From the following calculation it means that when the investors seek a return of 12% then earning per share will also increase but less significantly.
The long term growth rate earnings will increase but not at a slow rate and on reaching a certain point it might start dwindling. If there is an increase in the US interest rates which made the investors require a1% higher, then the share price will increase in order to cover the costs associated with the increase in interest rates. This is because if the price of the share remains stagnant the investors would experience a great loss. If there is good news that makes the analysts revise their long term growth forecast 0.5% above 2.9867, then the share price would be 100% = 2.986 100.05%= (100.05 *2.9867)/2= (298.8183)/2 = 2.988183, the change in share price would be
The share price would only change by 2.9881. The actual growth rate will be 53.88833. The sustainability of the growth earnings will be depended upon factors such as the fluctuating rates of interest. If the rates of interest in the market are low then the growth earnings will be higher and if the rate of interests increases then the growth in earnings will be lower.
In the next 2-3 years the growth in earnings will be stable after which the stability may dwindle. Another reason is if beta varies a lot between sources, that is, different time and index benchmarks. In addition, sustainability may be affected if growth estimates greatly differ. The good news in the company is that JP Morgan will be upgraded from neutral to overweight and the defence sells off avails a trading opportunity for the company. The defence also represents a relatively safe haven from the broader market in a period of economic weakness and uncertainty.
Required return = riskless rate + Beta * Excess Market return.
= 2.60 + 0.8624* 3.0237 = 5.26594
Required Return = 3.28 + 0.47 * 3.0237 = 11.338875
Required return = 3.96 + 0.63 * 3.0237 = 13.8783
Mean = 13.8783 + 11.338875 + 5.2659 = 30.483558 = 10.1611
3
Standard deviations = √ 10.1611 = 3.1876
Skewness = ∑ (Y – Y) 3 = (2.60- 10.1611) = (-7.5611)3
1 (N-1) s3 (3-1) (3.1876)3 2 (32.3885) = 432.2698
64.777 = 6.6731.
This is the measure of symmetry or in other words as lack of symmetry. In symmetrical terms the distribution of the data on the stock price will be symmetrical if it is the same in the three quartet’s of the business operation, which is, taking the current share price as the centre point.
Kurtosis = ∑ (Y- Y)
1 (N-1) s4 = 7.5611
2(32.3885)4 = 7.5611 = 7.5611 = 0.00000034355
2(1100432.3280) 2200864.32 = 0.00000034355.
Kurtosis being the measure of how the data is flat or peaked relative to a normal distribution will indicate whether the data on the stock prices have high kurtosis or low kurtosis. A high kurtosis will mean that the data has a distinct peak near the mean, which is, 10.1611. Monthly returns will be = 3.1876 which indicates the amount per share the shareholders are likely to get per month. The annual return will therefore be the amount the shareholders are likely to get per year ceteris paribus.
However, due to constant changes in interest rates, normal market fluctuations, the difference in growth estimates and the variation in beta values between resources, that is difference in time and index benchmark the figures might not hold for any particular competitive market situation. With the current news about the wars and the need to make more US defence missiles for border control and the previous JP Morgan upgrade from neutral to overweight which represents a trading opportunity which represents a relatively safe haven from the broader market in a period of economic weakness and uncertainty, the company’s market capitalization is set to increase.
The following recommendations are therefore vital to the company. The first is that when the stock has a fair price then the company should hold. In the short term, the company should sell its stock but in the long term, the company should buy the stock. The company should buy the stock when the PE ratio is lower than that of its competitors so as to balance the loss due to market fluctuations and the fluctuation in interest rates.
On astrological terms, the company should buy stock on its next planetary alignment. Other recommendations include when the stock prices are favourable then in the current month the company should buy seven times as much and this should continue until the last, two months past and three months past the issue.
When the stock is underperforming then the company should only buy once in the current months but not in consecutive months. From the Raytheon company NYSE 2nd year chart the firm should invest both in the short term events as well as the intermediate events because the returns are high as compared to the long term events. The period of investment should be from September to May.
From the direct competitor comparison table, it is clear that the company faces stiff competition from various companies in the same industry. This is especially evident from the market capitalization figures of various competitors. For example, the Market capitalization of BA (Boeing Company) and LMT (Lockheed Martin Corporation) is higher than that of Raytheon a clear indication of the market the two companies command.
Despite this, the quarterly renew growth shows that RTN has a higher revenue growth than other players in the same industry which makes its stock more admirable and prospective investors are highly attracted to such a company. The company’s gross margin also shows that the company is more attractive in terms of investment decisions that any investor may decide to make because in spite of its low revenues as compared to other company’s in the industry, its gross margin is higher than the key players in the industry such as BA and LMT.
This from the market returns perspective indicates that the company’s stock will have a higher market return than all other company’s in the industry. This is especially supported by the earning per share figures for the four companies. The returns from TRN are higher than that of BA and LMT despite the fact that BA and LMT have a higher net income than RTN. The company basing on the technical analysis should sell its stock in the short term but buy them in the long term. This is because as mentioned above the short term market returns are higher than the long term market returns.
References
Mukras, D. The Essence of stock Valuation, New York: New York Press, 2003.
Mikre, W, Skewness and Kurtosis of a distribution, Oxford: Oxford University Press, 2004.
Wellington, T. Market trends and stock valuation, New York: New York: New York Press, 2004.
Hlecre, S. Required Rate of Returns on Shares, Oxford: Oxford University Press, 2007.
Dorny, B. Analysis of the Share Market, New York: McGraw Hill, 2003.
Lerny, V. Attributable features of the Share Market, New York: New York Press, 2005.
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