Raytheon Technologies Corp. (RTX, Financial) has been a mainstay of the aerospace industry for decades, yet it has frequently found itself overshadowed by its larger peers, especially the sprawling Boeing Co. (BA, Financial) and the dynamic Lockheed Martin Corp. (LMT, Financial). That may soon change, however, if current trends persist.
Synergies and disruptions
Raytheon was already a large and varied organization even before it merged with United Technologies Corp. last year. As I discussed in January, the merger resulted in a far larger and more complex organization; so much so, in fact, that a number of prominent analysts and investors expressed considerable skepticism about the deal. Raytheon’s leadership was unperturbed, however. Speaking at the 2019 Paris Air Show soon after the merger was announced, Raytheon’s then-Chief Financial Officer Anthony O'Brien highlighted the key benefits of adding United Technologies’ commercial aviation capabilities to Raytheon’s respected defense business:
"[The merger] provides resiliency and it allows the company to be a stronger competitor in any cycle. Because of the financial strength of the company out of the gate, [it] allows us to continue to invest mutually in technologies — whether it be on the commercial, the defense side or a technology that benefits both — and at the same time, in parallel continue to shareholders."
Thanks to the economic and social disruptions that have roiled markets since early 2020, Raytheon has not been able to benefit quite as much from its newly acquired commercial aviation business. Commercial aircraft demand was dented significantly in the wake of travel restrictions and lockdowns over the past two years. That impacted its commercial aircraft operations, as it has for virtually every commercial aerospace company.
However, the strength of Raytheon’s defense business has more than made up for these headwinds thus far. Moreover, as the global economy has rallied in recent months, the commercial aircraft engine manufacturing business has rebounded, driving growth in the third quarter especially.
From bronze to gold
In the third quarter, Raytheon delivered impressive sales and profitability numbers, driven in large part by rebounding demand for its commercial aircraft aftermarket services as well as continued strength in its defense segment. The company reported net income to the tune of $1.4 billion, up more than 500% from the $264 million it managed in the same period last year and blowing away analyst estimates by a wide margin.
Raytheon appears to be on a strong trajectory heading into 2022. As a result, some industry watchers have begun to whisper than it may be able to surpass its rivals. According to an analysis by industry expert Loren Thompson published in September, Raytheon could become the biggest U.S. aerospace player within the next decade:
“One outcome that has gotten little attention but looms as a real possibility later in the decade is that Raytheon could emerge as the nation’s leading aerospace firm. At the moment, three companies can aspire to that status on the basis of revenues: Boeing, Lockheed Martin and Raytheon Technologies. Investor advisory service Value Line figures that Boeing could generate $74.7 billion in sales this year, while Lockheed is projecting $68-69 billion and Raytheon is projecting $64-65 billion. However, in future years Raytheon Technologies has much greater growth potential than Lockheed by virtue of its sprawling commercial business. Boeing’s prospects are clouded by recent setbacks in both its commercial and military units—the kind of setbacks that take years to recover from in a long-cycle business.”
Boeing’s myriad troubles, which I have discussed at length previously, have left it somewhat stalled. Meanwhile, Lockheed’s business is fundamentally limited by its narrower focus on defense and space-based aerospace technologies and products. That opens up an intriguing opportunity for Raytheon to step forward as the nation’s preeminent aerospace company.
My take
Raytheon arguably has tons of potential. If it can leverage its commercial aerospace vertical effectively in the years ahead, I could see it claiming the top spot among U.S. aerospace companies. However, as the disruptions of 2020 have shown, there are many variables at play. Raytheon will have to execute extremely well if it hopes to reach such a lofty perch.
