Raytheon Technologies (RTX) emerged as a pure bet on aviation and defense this year, though coronavirus and Boeing (BA) headwinds remain. Is Raytheon stock a good buy right now?
Raytheon Technologies emerged in April from the merger of defense contractor Raytheon Company and industrial giant United Technologies. But Raytheon stock was kicked off the Dow Jones index Aug. 31, making way for Honeywell (HON), in a reshuffling of the blue-chip stock index.
The Waltham, Mass.-based company ranks among the top defense stocks. It makes jet engines for Boeing and Airbus (EADSY), as well as the Patriot missile defense system, the Tomahawk cruise missile and radar systems for Lockheed Martin (LMT).
Raytheon comprises four businesses: Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense.
Raytheon Stock Technical Analysis
After a rally off coronavirus lows, Raytheon Technologies has moved sideways since June. Shares have been meeting resistance around the 65 price level. The move came as Raytheon earnings beat views for the third quarter but aviation sales plunged. The ongoing coronavirus pandemic has whacked global commercial air travel and canceled flights.
The relative strength line for RTX stock has fallen to its lowest level in about a decade, according to MarketSmith charts analysis. That's a sign of severe underperformance against the market. The iShares U.S. Aerospace & Defense ETF (ITA) counts Raytheon stock among its top holdings. The ITA ETF, which ran up sharply in 2017, is below its 50-day and 200-day lines.
Raytheon is a well-traded stock with solid institutional backing. The number of funds holding RTX stock fell to 2,266 in September from 2,448 in June.
Raytheon Earnings And Fundamental Analysis
On key earnings and sales metrics, RTX stock earns an EPS Rating of 48 out of 99, and an SMR Rating of B, on a scale of A+ to E, with A+ the best. The EPS rating reflects a company's health on fundamental earnings, and its SMR Rating measures sales growth, profit margins and return on equity.
Raytheon earnings fell sharply for Q3 but beat Wall Street estimates despite weak sales. The company took significant cost-cutting and cash-conserving actions. Raytheon generated $1.23 billion in free cash flow (FCF). Collins Aerospace parts sales dropped 34%. Pratt & Whitney jet engine sales also fell 34%. The defense business remains robust, Raytheon said.
Raytheon, like customer Boeing and jet-engine rival General Electric (GE), predicts a slow aviation recovery from the deadly virus outbreak.
When Raytheon reports Q4 figures, analysts expect EPS to slide 64% and revenue to fall 18%, according to Zacks Investment Research. Wall Street sees Raytheon EPS crumbling 66% in all of 2020, then rebounding 35% in 2021.
The Otis elevator and Carrier air conditioner units were separated from United Technologies earlier this year, prior to the combination with Raytheon Company.
Over the past three years, Raytheon EPS fell 2% on average annually and sales rose 1%. Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. Raytheon falls short on both counts.
On other key fundamental metrics, Raytheon Technologies has a not-so-great 10% pretax margin and 14% return on equity, which is below the 17% or higher an investor would want to see.
Boeing 737 Max, Coronavirus Headwinds
Aviation is among the industries hit hardest by the coronavirus pandemic. Raytheon's pivot to being an aviation pure-play company coincided with the downturn. Profits at Collins Aerospace fell 58% in the first nine months of 2020 due to the collapse in commercial air travel. Collins makes avionics systems. It also supplies the Boeing 737 Max jet, which remains grounded around the world after two fatal flights.
Collins, Raytheon's largest segment by revenue, includes the $30 billion Rockwell Collins acquisition in 2018.
In the first nine months of 2020, Pratt & Whitney saw a $597 million loss vs. a $1.45 billion profit in the same period last year.
On Oct. 27, Raytheon CEO Greg Hayes said the company will cut 20,000 positions. The prior month, he announced more than 15,000 job cuts, which at the time was nearly double a July estimate.
Most of the cuts will come from Pratt & Whitney and Collins Aerospace. Raytheon is also cutting 20%-25% of its office space, up from initial plans for a 10% cut, as more employees are expected to work from home even after the pandemic ends.
On Sept. 21, Goldman Sachs added both Raytheon and Boeing to its conviction buy list, while removing L3 Harris (LHX) and Lockheed Martin. The firm expects more upside for companies exposed to commercial air travel than for defense-focused firms.
On Raytheon, Goldman Sachs said "it is too high quality and well positioned of a company to trade at an 11% free cash flow yield." On Boeing, it cited a significantly slowing pace of cancelled aircraft orders.
Meanwhile, Raytheon's vying with General Electric and the U.K.'s Rolls-Royce to replace 608 engines on the Air Force's B-52 bomber jets, a contract worth billions. Raytheon's Pratt & Whitney is the incumbent engine supplier to the storied but aging jet.
The contract will be awarded in mid-2021.
Hypersonic Weapons, Classified Investment
Raytheon's military units continue to perform well amid the coronavirus, shielding the company overall. Raytheon Intelligence & Space as well as Raytheon Missiles & Defense are not seeing pay cuts and job cuts.
In Q3, notable bookings included:
$186 million on the Army Navy/Transportable Radar Surveillance-Model 2 radar program for the Kingdom of Saudi Arabia at Raytheon Missiles & Defense
$928 million on a number of classified programs at Raytheon Intelligence & Space
$473 million in F-135 bookings at Pratt & Whitney
$320 million at Collins Aerospace tied to services for NASA's Extra Vehicular Activity program
Meanwhile, hypersonic weapons are among the top priorities at the Pentagon. China and Russia have demonstrated their own superfast weapons, which fly five times faster than the speed of sound in an unpredictable flight path, evading any existing defenses.
The Defense Department has several hypersonic programs in the works, spreading billions of dollars around to its top contractors. For example, Lockheed Martin and Raytheon are working on separate Tactical Boost Glide (TBG) weapons, a DARPA-Air Force tandem effort.
The merger should also boost Raytheon's hypersonic weapons technology, and Raytheon is looking at hypersonic weapon defense as well. Overall, Raytheon has been bullish on such classified Pentagon programs, potentially giving RTX stock a boost for years to come.
Developing replacements for legacy weapons is another top military priority. In April, the U.S. Air Force selected Raytheon for a contract potentially worth $10 billion to develop the Long-Range Standoff weapon (LRSO), a next-generation nuclear cruise missile to be launched from strategic bombers, such as Northrop Grumman's (NOC) forthcoming B-21 stealth bomber.
Is Raytheon Stock A Buy In 2020?
In the near term, Raytheon Technologies is poised for some earnings pain amid Boeing 737 Max and coronavirus headwinds. But it should return to growth thereafter.
A mix of commercial and defense businesses should help Raytheon balance cyclicality. And hypersonic and classified programs could provide a lift in the future, though it's not certain how much they will move the needle for the new company.
From a technical perspective, RTX stock shows no clear pattern. It is testing the 50-day average and remains below the 200-day line. That's not a great sign. The relative strength line moved steadily lower in 2020 after moving sideways for years.
Meanwhile, the commercial aerospace industry is among the hardest hit by the pandemic. As a result, the aerospace and defense industry group to which Raytheon Technologies belongs also is momentarily lagging.
As the coronavirus pandemic lingers, commercial aviation's recovery could be further off than it appeared just a few months ago. Indeed, Raytheon's recent job cuts suggest this to be the case.
Bottom line: we consider Raytheon stock to be a hold right now. But it's certainly one for your investing watch list, as a faster-than-expected recovery in global air travel could mean tremendous upside for this former Dow stock.
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Article partially appeared on investors.com
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