A closer look: Raytheon (RTX)
Dec 15, 2022
Holding Name: Raytheon Technologies (NYSE: RTX)
Strategy: Opportunities
Percent weighting of strategy: 9.3%
Titan’s Takeaway: Security concerns around the world are rising, driving an increase in demand from governments and commercial sectors for defense and aerospace technology. In our eyes, Raytheon is well-positioned to benefit from the multi-year tailwind driven by increased global military budgets. Raytheon plans to buy back $6B worth of shares and distribute $3B in dividends in 2023 (~6.3% of market cap) – this compelling shareholder return profile provided Opportunities with a nice level of stability.
Business overview: Raytheon Technologies is a dominant, global manufacturer in aerospace and defense equipment that provides systems and services for commercial, military, and government customers worldwide. It is also one of the largest providers of intelligence services.
The company operates in four segments:
Collins Aerospace: Offers aerospace and defense products, mission systems and power and control systems for aircraft manufacturers and airlines across the commercial, regional, business aviation and military sectors.
Pratt & Whitney: Designs and supplies advanced engines for commercial, military, and business aircrafts.
Raytheon Intelligence & Space: Develops and provides advanced sensors, cyber services and software solutions to intelligence, defense, federal, and commercial customers.
Raytheon Missiles & Defense: Designs, develops, produces, and sustains integrated air and missile defense systems, combat solutions, communications, and more for the U.S. and foreign government customers. Raytheon Missiles & Defense is the world’s leading defense integrator.
Why we own it: Given the strong macro backdrop for defense, Raytheon should see multi-year tailwinds once higher military spend is realized potential.
Our Raytheon investment thesis is based on three main drivers:
Raytheon's Civil aftermarket division is well positioned for growth from V2500 fleet maintenance visits. Raytheon has more than 12,000 V2500 jet engines in service as of 2021. With 50% of these engines set to make their first maintenance shop visit and ~40% scheduled to make their second shop visit in the coming years, Raytheon's aftermarket division is well-positioned to exhibit robust revenue growth and margin (profit) expansion.
Defense Missile Segment provides Raytheon with stable, high ROIC cash flow amidst a volatile operating environment. Current geopolitical dynamics and historical outperformance in low-growth environments should support robust growth with revenues steadily growing at 6% CAGR (compounded annual growth rate) with low double digit margin profile through 2024. Further upside could come from additional contracts agreements signed with the Department of Defense and Department of Homeland Security, as was seen during 2020 and 2021.
GTF engine deliveries provide upside optionality. Raytheon's GTF engine provides substantial upside potential as the cumulative installed base reaches an estimated 6,000+ planes and is driving an additional $1bn+ in potential earnings by 2025.
What’s the latest: On December 12th, Raytheon Technologies' board authorized the repurchase of up to $6B of the company's outstanding common stock. The newly announced program replaces a previous $3.5 billion approved December 7th, 2021.
The buyback signifies the company’s strong financial position and ability to generate strong free cash flow to distribute – maximizing value for shareholders. Raytheon continues to maintain strong sales growth, with total revenues up 5% year-over-year in the last reported quarter.
Sign posts moving forward: We’ll be watching two factors closely.
Firstly, we’ll be keeping an eye on trends in aftermarket or engine shop visits. As global traffic volumes continue to recover back to pre-covid levels, increasing flight activity should promote higher aircraft engine shop visits (or maintenance) and in turn, drive higher revenue/earnings growth.
Secondly, supply chain bottlenecks including raw material shortages and labor constraints have become increasing headwinds for Raytheon in recent quarters, particularly within its defense segment. While these bottlenecks have steadily improved throughout the year, this will be a key focus point.
The content contained in this material is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, solicitation of an offer, or investment advice.
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