Raytheon Technologies (RTX) is an aerospace and defense company that provides advanced systems and services for commercial, military, and government customers worldwide, explains Joe Laszewski, CFA, CPA and senior portfolio manager at Stack Financial Management.
The company formed in 2020 through the combination of Raytheon Company and the United Technologies Corp.’s aerospace businesses.
With four business segments ― Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense ― RTX delivers industry-leading solutions in avionics, aircraft engine design and manufacturing, cybersecurity, and hypersonic missile systems.
Raytheon Technologies combines the backbone of a high-quality defense contractor with a more cyclical commercial aerospace business – creating an appealing combination of both defensive structure and cyclical upside.
Commercial aerospace was severely challenged by the COVID-19 pandemic, and at the beginning of 2021 we saw substantial upside potential in RTX shares in the event of a faster than expected return to normalcy in the industry.
We believed that RTX was well-positioned to capitalize on this opportunity, as its Pratt & Whitney segment was able to increase market share by more than 10% during 2020 due to its superior balance sheet and ample cash position.
Although commercial aerospace is still not expected to fully recover until 2023, the successful rollout of COVID-19 vaccines set off a leisure travel boom much sooner than anticipated.
This resulted in a substantial increase in Raytheon’s long-term growth estimates from -7% at the beginning of the year to +21% today. There could be further upside revisions for RTX and the commercial aerospace industry if the demand environment for leisure travel continues and business travel begins to recover.
At the time of our initial recommendation Raytheon shares traded well below their median price-to-cash-flow multiple of the past decade. RTX shares still have attractive upside based on forward cash flows, and cost cuts and merger synergies should help drive shareholder returns as the demand environment continues to recover.
In the meantime, RTX offers a solid dividend yield of 2.3% and a strong balance sheet backed by relatively durable cash flows and earnings growth on the defense side of the business.
We continue to hold our position in RTX as an investment in the ongoing economic recovery and our belief that investors are underestimating the demand for both leisure and business air travel. While there is less downside priced into RTX shares today than at the beginning of the year, cash flow generation continues to impress, and RTX remains a compelling cyclical value opportunity moving forward.
Disclosure: It should not be assumed that future performance of any specific investment, including the above, will be profitable, equal any historical performance level, be suitable for your portfolio or individual situation, or prove successful. Clients and individuals associated with Stack Financial Management may hold positions in and may, from time to time, make purchases or sales of this security.
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