Raytheon Technologies [NYSE:RTX] has been in the headlines for all the wrong reasons this week: not one, but two engines maufactured by its subsidiary Pratt & Whitney have seemingly come apart in mid-air, one on a United Airlines Boeing 777 over the United States, the other on a cargo 747 over the Netherlands. It’s bad news for Boeing, worse news for Raytheon, BUT Raytheon stock is on a bit of a blinder at the moment and worth keeping an eye on.
Solid momentum as institutional money goes back to aviation
We are seeing some great momentum on the stock, which has come back from $52.34 in November, to trade close to $78. Pre-pandemic the stock was close to $100 and had been working its way up there over a long time horizon. Traders rightly dumped it as the entire commercial aviation market went into hibernation.
Raytheon is not just a commercial aviation play – it also has a significant defence sector presence which has considerably contributed to free cash flow in 2020. And we think that its commercial aviation division will be coming back to life in 1H 2021.
Pratt & Whitney, which has been making headlines for all the wrong reasons recently, builds engines mainly for commercial aerospace. But most of the business, if you measure it via Q4 2020 adjusted operating profit, is in the defence sector, oriented around Raytheon Intelligence & Space ($355m profit Q4) and Raytheon Missile & Defence ($586m).
Solid set of numbers and excellent medium term growth projections
Raytheon is expecting to see substantive year-over-year sales and earnings growth when compared to the pandemic period last year. Full year guidance is for organic sales growth of 0-3% and free cash flow of $4.5 billion and an adjusted EPS of between $3.40 and $3.70. The company is being touted in Wall Street as a mid to long term growth opportunity and it is already paying out a 2.9% dividend yield.
Raytheon stock saw some significant buying activity on Wall Street on Wednesday, which could cause some short term profit taking, but anyone jumping ship on Raytheon stock now would be very short sighted in our view.
“The aggressive short- and long-term cost reduction actions that we’ve taken have enabled us to emerge from 2020 as a stronger company with a better cost structure and stronger free cash flow generating capabilities,” said CEO Gregory Hayes on Raytheon’s latest earnings call. “To be clear, when the commercial aerospace markets rebound, I’m confident in our ability to get back to the levels of cash flow contemplated before the pandemic.”
Jim Cramer host of CNBC’s Mad Money is also upbeat. “When you look at Raytheon and when you look at General Electric, has it occurred to you that nobody is flying and yet they’re crushing it when it comes to aviation?,” he said recently.
We remain optimistic about prospects for this stock: it has the cushion of a solid defence business which will continue to see demand in 2021, but the attractive qualities of an aviation division that is going to come back online as the pandemic retreats. Analysts were impressed by the last set of numbers and we can see many institutional investors wanting to get back into the stock now as it represents a more conservative, real economy play without some of the frothy numbers we have been seeing from the technology sector.