According to government data, there are currently 32 countries around the world involved in some sort of military conflict. This includes traditional war, terrorist insurgencies, civil war, drug wars and ethnic violence. This could bode well for publicly traded defense contractors, but one of those is going in the opposite direction – RTX Corp. (RTX, Financial).
Formerly Raytheon Technology Corp., the company is the result of the merger of equals between the aerospace subsidiaries of United Technologies Corp. and the Raytheon Co. in 2020. Before the merger, United spun off its non-aerospace subsidiaries Otis Worldwide Corp. (OTIS, Financial) and Carrier Global Corp. (CARR, Financial).
The company has four key segments: Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space and Raytheon Missiles & Defense.
The Collins Aerospace Systems provides products such as cabin interiors, oxygen systems, food and beverage preparation, storage and galley systems and lavatory and wastewater management systems, airborne intelligence, surveillance and reconnaissance systems and crew escape systems. The Pratt & Whitney segment supplies aircraft engines for commercial, military, business jet and general aviation customers. The Raytheon Intelligence & Space segment provides integrated space, communication, sensor systems, cyber and software solutions to intelligence, defense, federal and commercial clients. The Raytheon Missiles & Defense segment provides solutions for U.S. and foreign government customers designed to detect, track and engage threats.
Founded in 1934, the company currently has a market capitalization of $105 billion.
Pratt & Whitney problems
In August, the company announced that its Pratt & Whitney division issued a recall of 1,200 engines due to microscopic cracks which caused operational disruptions for airlines around the world. The durability problems of the geared turbofan engines are compounded by the risk of crack formation, with approximately 11% of GTF-powered A320 aircraft currently parked. This engine issue has significant impacts on airlines, with carriers being forced to ground their fleets and source spare parts to avoid troubles during the busy summer travel season.
In September, the company estimated an additional 600 to 700 engines will be taken out between 2023 and 2026. The company now expects a cash headwind between $3 billion and $3.5 billion related to these issues over the next two to three years.
Backlog and bookings
The company continues to record solid bookings. Its backlog at the end of the second quarter was $185 billion, of which $112 billion was from commercial aerospace and $73 billion was from the defense industry.
Notable defense bookings during the quarter included:
- $2 billion for F135 production at Pratt & Whitney.
- $1.50 billion for F117 sustainment at Pratt & Whitney.
- $1.20 billion for AMRAAM production at Raytheon Missiles & Defense.
- $1.10 billion of classified bookings at Raytheon Intelligence & Space.
- $322 million for a diverse set of cyberdefense services for federal and civil customers at RIS.
- $294 million of classified bookings at RMD.
- $265 million for Javelin production at RMD.
- $251 million for AIM-9X production at RMD.
- $237 million for CLEAVAR counter UAS production at RMD.
Financial results
The company recently reported second-quarter financial results that showed strong double-digit revenue growth. Sales increased 12% to $18.3 million compared to the prior-year period. Organic sales growth increased 13%.
GAAP earnings per share from continuing operations was 90 cents, which was an increase of 2% versus the prior-year period. This included 39 cents of acquisition accounting adjustments and significant non-recurring charges. Adjusted earnings per share increased 11% to $1.29.
Operating cash flow was $719 million in the quarter and with $526 in capital expenditures, free cash flow was $193 million. Cash on the balance sheet as of June 30 was $5.4 billion and total debt was $38.8 billion. Share repurchases totaled $596 million. Over the past three fiscal years, the company has repurchased shares totaling $5.2 billion, unfortunately at share prices much higher than today.
Valuation
Consensus analyst earnings per share estimates for 2023 are approximately $5 and for 2024, the estimate is $5.57. That puts the company selling at 14.3 times current year earnings estimates. The enterprise value/Ebitda ratio is approximately 10.7 times using 2023 estimates.
The GuruFocus discounted cash flow calculator creates a value of $89 when using an earnings starting point of $5 per share and a 10% 10-year growth rate. The discount rate being used is also 10%.
There are 17 Wall Street analysts that cover the company with an average price target of $90 per share, which includes a high target of $110 and a low target of $75.
RTX pays an annualized dividend of $2.36, creating a dividend yield of 3.17%. The payout ratio based on 2024 earnings per share estimates is 42%.
Guru trades
Gurus who have purchased RTX stock recently include Ken Fisher (Trades, Portfolio) and Jefferies Group (Trades, Portfolio). Gurus who reduced or sold out of their positions include Robert Olstein (Trades, Portfolio) and Hotchkis & Wiley.
Summary
Although RTX is going through some troubled times, selling at 52-week lows, it may represent a solid investment opportunity for long-term value investors.
The company typically has to deal with macroeconomic issues such as terrorist attacks or global pandemics, which would affect commercial aviation. However, if the GTF issues are resolved in a timely manner, or even ahead of schedule, that could be the catalyst that drives the stock upward.
