We’ve initiated a position in Raytheon Technologies (RTX) for Opportunities clients, using the proceeds from reduced stakes in consumer discretionary names in the portfolio. We have also sold long time holding PayPal (PYPL) and trimmed Amazon (AMZN) for clients in our Flagship strategy.
We have initiated a position in Raytheon Technologies (RTX), a duopolistic leader in the aerospace & defense industry. RTX has a leading market position in aircraft engine and equipment manufacturing, a strong free-cash-flow growth profile, and a durable competitive moat. Using conservative estimates, we believe shares could rise to $140 by the end of 2024, implying a 19% annualized return net of fees.
As outlined in our initiation report for Offshore holding Safran (SAFRY), we’re extremely bullish on the secular growth of the commercial aerospace industry. The industry has grown at mid-single digits for the past 50 years, and global passenger volumes have historically grown at twice the pace of GDP. We believe the industry may return to or exceed this growth trajectory amid ongoing tailwinds from the economic reopening and pent up demand for consumer travel.
In addition to commercial aerospace growth, Raytheon’s business is highly levered to US / International Defense budgets which have steadily expanded as a portion of government expenditures and provide stable source of revenue/earnings growth through long-term supplier contracts. We believe recent headlines regarding geopolitical tensions are a reminder that defense spending may prove to be a persistent tailwind for RTX over the long-term.
To fund this position, we have trimmed our consumer discretionary holdings Hayward (HAYW), Five Below (FIVE), Farfetch (FTCH) and Floor and Decor (FND).
From our first-party channel checks and recent earnings read-throughs, there may be a general slowdown in consumer demand in the coming months and believe our portfolios may be better positioned with reduced exposure to this theme. We have also elected to maintain our strategic cash reserve for Opportunities portfolios at this time given persistent volatility in the market and believe we may be able to deploy this capital as conditions improve.
Par Technologies (PAR) is a leading restaurant software and hardware provider servicing establishments including Sweetgreen & McDonald’s and had been a holding in the Opportunities strategy since inception.
There continues to be optionality with the business, including the potential to sell their government business, the company’s integration of recent acquisition Punchh continuing to be a larger success than investors initially expected, and reopening tailwinds. Analysis on information recently released by the company reveals its software business is burning significant cash and we determined the runway to profitability was too elongated. Thus, we believe investors are not getting compensated for the risks inherent in these potential outcomes, and we believe the portfolio is better served by shoring up cash we may be able to deploy into better risk/reward opportunities in the future.
We sold our position in PAR at roughly the same price we bought shares for clients in August of 2020.
After many years of flawless management execution, PayPal (PYPL) has devolved into a “show me story,” and is now trading at prices last seen in April 2020. After first investing in PYPL in February 2018 and being a steady contributor to the portfolio, we elected to sell out of our position at a 61% gain, or a ~14% IRR annualized return net of fees – though a disappointing result relative to our +15% net annualized return target.
Against a deteriorating macro backdrop and stiffening competition, we believe the risk/reward has now become skewed to the downside and considering the high opportunity cost of sitting in what could be a range-bound stock for multiple quarters.
It’s not our business to step in (nor could we…yet), but we believe PayPal is ripe for an activist investor to get involved. The stock is now more than 50% off all-time-highs, management has clearly faltered, the company's first mover advantage with Venmo has been squandered, and we believe these are just a few of management’s recent missteps. We expect to see sharks swarm.
As mentioned above, we believe we may be entering a cyclical slowdown for consumer spending. In the coming quarters, companies levered to consumer spending will continue to have their work cut out for them as continued supply chain bottlenecks keep shelves barren, wage inflation pressures staffing levels, stimulus rolling off impacts lower-income consumers, all while these companies lap some of their best results on record. In this environment, we believe it is prudent to reduce our position in Amazon (AMZN), which grew to be outsized over time.
We continue to be very happy long-term holders of Amazon, and will monitor the potential impact these trends have on their business in the year ahead and could opportunistically increase our position should conditions warrant.
As always, let us know if you have any questions about these moves, and we hope you have a great weekend.
Titan Investment Team
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