Stock of the Week

Raytheon Tech

May 11th 2020

Raytheon Technologies
NYSE Symbol: RTX
Industry: Defense/aerospace
Price as of 5/08/20: $58.64

 

The aerospace industry is in uncharted waters with COVID-19 shutting down the major airlines. While the federal government and Congress have stepped up to help the airlines and the rest of the sector to prevent massive bankruptcies, the road to recovery will be long. Investors looking to reduce exposure to the airlines or Boeing, but still invest in the aerospace sector may want to look at defense stocks with a majority of their business coming from governments around the global. We highlighted the largest defense stock, Lockheed Martin which has already rebounded over 30% in the last several weeks. Northrop Grumman is another defense play which has rebounded 30% from the March lows, but this week we will highlight the recently created, Raytheon Technologies Corp (RTX).

Last year Raytheon and United Technologies agreed to merge in a $100 billion all-stock deal. Fast-forward a year and the combined company is worth $100 billion after spinning off Otis elevator business (OTIS) and the Carrier air-conditioning unit (CARR). The new Raytheon Technologies includes United Technology's commercial aircraft operations along with Pratt & Whitney engine business, United Technology's defense unit, and all of Raytheon, one of the leading defense contractors. The combined company is a formidable aerospace and defense pure play with over $70 billion in net sales last year to rival Lockheed Martin for the number one spot.

The bull case for Raytheon Technologies is the relatively stable defense business, accounting for about 65% of projected revenues pre-COVID-19. Management is hoping Raytheon's defense business and their $70 billion in defense contract backlog will get the company through this rough patch until the hard-hit aerospace unit comes back hopefully in 2021 or 2022.

Valuation for Raytheon and other stocks is tough in these uncertain times. Raytheon currently trades for 13 times reduced earnings estimates for 2021. To start the year, management at the two companies projected $8 billion to $9 billion in free cash flow in 2021. Analysts are now projecting $6 billion with the potential for $7 billion to $8 billion in free cash flow in 2022. These estimates give Raytheon a better free cash flow yield than Apple with plenty of room to raise their dividend, buy back stock or pay down their debt. The current dividend yield of 3.11% with an ex-dividend date next week is suited for income investors with a long-term perspective. Analysts have been initiating coverage on the newly created Raytheon Technologies. Most analysts have hold ratings with price targets in the upper $50 to low $60 a share range. The high estimates go to Goldman Sachs with a $76 a share price target and a boutique firm highlighted in Barron's a couple weeks ago with a $80 price target. In the short term, Raytheon Technology's stock price and fundamentals will remain volatility, but longer term the newly created company should reward shareholders with good income and capital appreciation potential.