On Oct. 27, Raytheon Technologies Corporation (RTX, Financial) issued its third-quarter earnings results. The market was disappointed by the news and went on a selling binge that brought the price down to $52.34 before bouncing back, as shown on this three-month chart:
CEO Gregory Hayes responded to the downturn as quickly and confidently as only an isider could on Oct. 28, buying 55,000 shares at an average price of $54.82 at a total cost of $3,015,100.
Director James A. Winnefeld Jr. also bought on the 28th, and a day later he was joined by fellow director Dinesh C. Paliwal, as well by the Executive Chairman Thomas A. Kennedy and EVP and General Counsel Frank R. Jimenez. Collectively, they picked up another 29,591 shares.
Soon afterward, Mr. Market changed his mind about the stock, rising to close at $73.65 on Nov. 27. That made Haye's 55,000 shares worth 34.35% more than their cost. For the two who bought the next day, their shares were worth 40% more.
The 'new' Raytheon
In April of this year, Raytheon was reshaped when it completed a merger with another defense giant, United Technologies. With the merger, the combined company became known as Raytheon Technologies Corporation. The new company's operations were divided into four segments:
- Collins Aerospace Systems handles a wide range of aviation systems that it sells to commercial, business and military customers. In 2019, it had sales of $26 billion.
- Pratt & Whitney is a builder of aircraft engines and auxiliary power systems that are sold to commercial, business and military customers. This division brought in $21 billion in sales in 2019.
- Raytheon Intelligence & Space develops advanced sensors, training, cyber and software solutions. It generated $15 billion in 2019 sales.
- Raytheon Missiles & Defense produces end-to-end solutions that detect, track and engage incoming threats. It had roughly $16 billion of sales in 2019.
Executive Chairman Tom Kennedy wrote the following about the merger:
"Our platform-agnostic, diversified portfolio brings together the best of commercial and military technology, enabling the creation of new opportunities across aerospace and defense for decades to come."
Regulators were not overly concerned about a loss of competition but did specify that the new entity would need to sell several parts of its combined business, which it did.
Longer-term investments
As we've seen, the CEO and other insiders profited nicely from their recent buys of their company's stock, but what's ahead for them—and all other shareholders—in the longer term? Were these long-term buys that investors should consider following, or was this just a time-sensitive opportunity for insiders?
Broadly speaking, Raytheon seems well-positioned for the future. While commercial business may vary over cycles and because of events like the pandemic, the defense portion of its business should do well. While external threats and obligations vary over time, the political military-industrial complex makes sky-high defense spending obligatory for the U.S. and most of its allies.
On an industry basis, the merger should allow greater efficiencies and perhaps less competition. Because the regulators did specify that certain units of the two companies had to be sold off, that should help Raytheon sharpen its focus on its core businesses.
On a corporate basis, the new company has a moat thanks to its patents, unpatented expertise, and connections within and outside government.
Total return
The trendline on this price chart that ended on Nov. 28, 2019 indicates the old Raytheon was growing its share price at an average of 6.77% per year:
Of course, the new Raytheon is different, but it seems likely it can at least match this growth rate over the next five to 10 years (or the directors might have quashed the deal). As noted, the new company enjoys a couple of advantages not available to the old Raytheon.
To the estimated capital gains, we can add the current dividend yield of 2.92%. Adding the average gain in the share price and the current dividend yield we get a total return estimate of 9.69%.
Over the past 10 years, Raytheon has reduced its share count by an average of 1.34% per year:
If we add the historical share count reduction to the total return, the adjusted predicted total would be 11.03%. However, that might be a stretch, given it might take some years to get the number of shares back down to where it was before the merger.
Gurus
Gurus seem to like what they see at Raytheon in recent quarters, as they have been buying more shares than they've sold since the first quarter of this year:
In total, 20 of the investing experts followed by GuruFocus held shares in the firm at the end of the third quarter, led by:
- Dodge & Cox, which doubled its holding recently, adding 52.9% for a total of 30,322,795 shares on Sept. 30. That gave it a 2% stake in Raytheon.
- Chris Davis (Trades, Portfolio) of Davis Selected Advisers held the second-largest position with 11,122,836 shares at the end of the third quarter, a reduction of 1.28% from the second quarter.
- Barrow, Hanley, Mewhinney & Strauss wound up the quarter with 6,553,784 shares, up 7.37%.
Conclusion
When CEO Gregory Hayes and three of his colleagues made well-timed buys of additional shares in Raytheon Technologies in late October, they likely envisioned profits that went well beyond the short-term gains, in my estimation. By my calculations, investors can expect up to an 11.03% annual return if the company continues its historical growth trends.
Normally, CEOs are richly rewarded with shares as part of their compensation; in fact, they often receive more in stock incentives and bonuses than in cash. As a result, they sell some of those shares so they can diversify their personal portfolios. By jumping in to buy even more shares, Hayes and colleagues are signaling they see good things ahead for the new Raytheon.
At the same time, though, we should be aware that this may have been a limited-time insider opportunity, one that expired when the stock price regained its footing after the short, sharp drawdown.
Disclosure: I do not own shares in any of the companies named in this article.
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