Defense Breakdown: Raytheon Company (RTN), General Dynamics Corporation (NGD), United Technologies Corporation (UTX)

With 20% of Raytheon’s revenue coming from the faster-growing Asian and Middle East markets, this gives the company some diversification away from U.S. spending cuts. Fortunately, Raytheon Company (NYSE:RTN) only derives 5% of its revenue from Europe, so it avoids the continuing crisis there.

Both earnings and revenue fell broadly across all of Raytheon Company (NYSE:RTN)’s divisions during 2012, which was mostly due to the 75% decline in revenues from the US market. That said, divisional revenue only fell on average 10-20%, which indicates that although the US market is weakening, there is strength in other regions that continues to support the company.

United Technologies Corporation (NYSE:UTX)
United Technologies Corporation (NYSE:UTX) is the most diversified company in this piece. Unfortunately, the majority (26%) of the company’s non-U.S. revenue is from Europe, although this could include the faster-growing Baltic nations, which would give the company some protection from the defense cuts across the rest of the continent.

Twenty percent of United’s revenues are from the Asia-Pacific region, 45% from the U.S., and 9% from the rest of the world.

Geographical Split
U.S. $ Millions Revenue Earnings Profit Margin Year-Over-Year Change
Asia-Pacific $8,733 $1,648 18.87% -15.10%
Europe $11,823 $2,100 17.76% -20.50%
Rest of the world $4,964 $772 15.55% -8.60%
United States $32,175 $3,663 11.38% -55.80%

Figures in millions.

United Technologies Corporation (NYSE:UTX)’s highest profit margin comes from its operations in the Asia-Pacific market.  Although the majority of its revenues come from the U.S., this is actually a relatively low margin area for the company. Both of United’s European and Asian divisions produce a profit margin of more than 17%, while the company’s U.S. operations have a profit margin of only 11%.

Furthermore, earnings from the European and Asian markets together total more than the company’s earnings from the U.S. market. Leading me to believe that although the majority of United’s revenue comes from U.S. defense spending, the highly lucrative European and Asian markets will hold the company together while U.S. defense spending falls.

Defense Solutions $4,191 -39.60%
Health,Energy and $2,858 -27.00%
Intelligence & Cyb $3,540 -33.40%
Geographical Split – Revenue 2012
United States $10,587 -3%

Figures in millions.

It must be noted that SAIC’s 2012 revenues were affected by a one-time writedown of $540 million. Without this loss, the company would have produced 2012 revenues of $10,920 (up 1%) and earnings of $851 million (-10%), an operating profit margin of 7.7%.

All of SAIC’s revenues are from the U.S., offering no diversification away from spending cuts. However, unlike its peers in this piece, the company is active in the highly defensive pharmaceutical research market. In addition, it is involved in the manufacture of anti-viral treatments and devices to aid physicians in the fight against cancer.

SAIC’s operations within the highly defensive health-care sector give it one of the strongest outlooks in this group. Indeed, although SAIC only derives 27% of its revenue from health care, the company has a 10% profit margin on this revenue. On the other hand, SAIC’s defense division generated 40% of total revenue for 2012 but had a -4% profit margin.

So, overall, when it comes down to global diversification, United Technologies Corporation (NYSE:UTX) appears to have the best diversification based on 2012 revenues. General Dynamics has the worst diversification with almost all of its revenues based in the U.S.

Finally, SAIC has no global diversification but is diversified into other industries, most importantly pharmaceuticals.

The article Defense Breakdown originally appeared on and is written by Rupert Hargreaves.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Raytheon.

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