RTX - Raytheon Q4 Earnings: Why The Stock Is A Buy

Summary

• Raytheon posted revenue growth and issued a strong outlook.
• Backlog grew meaningfully.
• Company managing through supply constraints.
• Reiterate Buy rating on RTX stock.

In the last three months of 2022, aerospace and defence firms announced an increasing number of contracts with the U.S. government. Raytheon ( RTX ), in particular, is attractive. In Dec. 2022 alone, it announced three awards . After shares dipped to $88.60 following its last report in Oct. 2022 , the stock rallied to nearly $100 when it posted Q4 results.

What did markets like about Raytheon's numbers?

Raytheon Technologies' Revenue Growth

In the fourth quarter, Raytheon posted revenue of $18.09 billion , up by 6.2% from last year. CEO Greg Hayes said that the business supported the rapid commercial aerospace recovery and delivered critical platforms and advanced technologies for customers.

Back in 2020, at the height of the pandemic, aerospace firms suffered because of a shutdown in airline travel. By the end of this year, air travel will recover to 2019 levels, according to Chief Operating Officer Chris Calio .

Investors worried about UTC aerospace (now known as Collins Aerospace) and Raytheon coming together. In its third anniversary since the deal, the units are integrating nicely. The firm realized gross cost synergies of $1.4 billion. This year, the company will streamline its structure by focusing on three segments: Collins Aerospace, Raytheon, and Pratt & Whitney. The customer-centric structure is in the early phases.

In 2022, Raytheon's business rebounded sharply. It achieved $86 billion in new awards and booked $175 billion in total backlog. The firm managed through record levels of inflation and navigated through the supply chain disruption and labor constraints.

With $67.1 billion in sales for the full year, Raytheon still managed to return nearly $6 billion in capital to shareholders. This included $2.8 billion in stock buybacks. The immense levels of free cash flow of $4.9 billion exceeded the company's expectations.

The defence contractor put its cash generation to good use. It spent $9 billion in research and development and capital expenditure. Investors should expect it to introduce new technologies to its market. This will expand its margins as it automates production and takes advantage of digitization.

Raytehon's Outlook Exceeds Consensus

For the full year of 2023, Raytheon expects to earn up to $5.05 a share. This gives 19.7 times forward P/E on shares. Despite RTX stock scoring a D+ on both growth and value, the scores underestimate the favorable macroeconomic backdrop.

Raytheon's backlog growth benefited from the need for the country to invest in defence. The U.S. passed the Defence Authorization Bill and the Omnibus Appropriations Bill with a budget of $858 billion. The Bill allocates $10 billion in military aid for Taiwan through FY27 and $800 million for the European Deterrence Initiative . Raytheon supplies radar surveillance for Taiwan .

Its Missiles and Defense segment reported a notably strong book-to-bill ratio of 1.48 times and a backlog of $34 billion:

The unit's operating profit fell by 14%. The benefit of higher volume was offset by an unfavorable product mix and lower net program efficiencies.

Risks

The supply chain hurdles are stymieing both Lockheed Martin ( LMT ) and Raytheon, as explained here . Raytheon needs to restore its supply chain health this year. It maintained a physical presence at around 400 supplier sites. Its presence will increase as it qualifies more suppliers.

The company is cautious about the supply chain getting better. It does not assume a recovery until the back half of this year.

Inflation will add around $2 billion in additional labor and material costs. Raytheon will more than offset this through higher prices and aggressive cost reductions. For example, it will undergo continual process improvement. Automated factory hours and connected equipment are other ways it will increase productivity.

A Note To Dividend-Income Investors

The scores below suggest that LMT stock has an edge over RTX stock on dividend safety and growth:

Lockheed's dividend yield is 2.67%, above that of Raytheon at 2.21%. However, income investors should not consider either stock for the yield. Since the Fed Fund's rate will reach 5.0% this year, investors have better dividend income stocks to consider.

Raytheon beats Lockheed Martin stock on its growth score:

Investors should expect the threat of war to anticipate higher growth. Readers may position the portfolio to harvest the upside in the multi-year government spending in aerospace and defence by holding either stock.

Your Takeaway

Investors often become too concerned about inflation rates forcing the Fed to raise interest rates, which slows the economy. Yet Raytheon is sustaining research and development activities despite inflation-related higher costs.

The supply chain remains a challenge but it is improving. The defence contractor will continue to work more closely with its suppliers. It is also rewarding its staff. Last year, its $20 billion in compensation costs is an $800 million or 4% Y/Y increase.

Most importantly, investors are waiting for Raytheon to approach better valuations. This might arrive if markets speculate that the government will delay or limit spending. For now, defence spending levels will keep growing, justifying a bullish rating on this company.

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