RTX - What To Expect From Raytheon Q1 Earnings Next Week

2023-04-19 15:34:00 ET

Summary

• Raytheon rallied ahead of its first quarter earnings report after Lockheed Martin posted strong results.
• Watch for an update on cost pressure.
• Long-term bullishness unchanged: RTX stock rated a buy.

Investors who bought Raytheon Technologies ( RTX ) after the Q4/2022 earnings report are still ahead of the S&P 500 ( SPY ). The defense contractor's stock gained 5.0% since Jan. 25, 2023 , outpacing the index's 4.37% return.

Ahead of the first quarter earnings report, RTX stock found support at the short-term simple moving averages . Trading at above $104 at a price not seen in a year, what should investors expect from Raytheon's earnings report on April 25, 2023?

Raytheon Q1 Earnings Estimates

21 analysts have a $1.13 per share estimate for FQ1 2023 (March 2023) . After next year, the EPS estimate rises to $1.56.

Analysts are generally negative about the EPS trend. They lowered their forecast since 2021, likely based on Raytheon's ongoing supply chain disruption. In addition, the industry has a staff shortage, forcing defense contractors to pay more to attract workers.

In the chart above, analysts lowered their full-year 2023 EPS forecast from $6.09 in June 2021 to $5.02. Fortunately, investors who did not embrace the war economy before Russia invaded Ukraine are willing to pay a premium today. This sent Raytheon's valuation grade to a D+, offset by strong profitability and momentum quant scores.

As recently as February 2023, Chief Operating Officer Chris Calio said that inflation, labor, and the supply chain have become increasingly acute issues. Raytheon offset the headwind with tailwinds in commercial aftermarket strength. By the end of 2023, the company will have traffic levels returning to 2019 levels.

The reopening of China late last year is another tailwind. This adds to the positive revenue trends that should encourage analysts to upgrade their EPS forecast. When the company hosts Investor Day at the Paris Show in June , it will give investors its outlook for 2025. After announcing large contracts, as shown in the news feed , the $1.23 billion contract awarded on March 28 and the $1.2 billion contract with Switzerland were the most significant.

• Raytheon secures $237M U.S. Army contract - today, 8:08 AM
• Raytheon, Boeing awarded $400M contract by U.S. Air Force - Apr. 05
• Raytheon wins $1.2B contract to supply Patriot air defenses to Switzerland - Apr. 03
• Raytheon Technologies bags $113.63M Navy contract modification - Apr. 03
• Raytheon Technologies awarded $212.68M modification contract by U.S. Navy - Mar. 31
• Raytheon awarded $650.4M contract by U.S. Navy - Mar. 30
• Raytheon awarded $619.24M modification contract by U.S. Navy - Mar. 29
• Raytheon awarded $1.23B contract by U.S. army - Mar. 28

Outlook

Raytheon will likely remind shareholders about the ongoing cost headwinds. It has around 400 professionals working on the supply chain and with partners. This will increase the management's visibility on the status of the supply chain. The firm may adjust its engineering practices slightly to improve yield. However, investors will need to wait patiently for inflationary pressures to ease and for staff resources in the industry to improve.

The COO mentioned that although Raytheon hired 32,000 people, high attrition rates hurt its efficiency.

Inflation added $2 billion in costs, split between $1.2 billion from product and $800 million from labor cost inflation. In general, investors reduced risks by avoiding consumer goods companies that could not pass inflationary costs. Raytheon will outline some of its accomplishments in increasing productivity to offset the inflation headwind.

Investors should follow the money. The Department of Defense spent $604.25 billion out of the $1.98 trillion in total budgetary resources so far . Any earnings or revenue disappointment will prove temporary. Raytheon has the DoD's spending commitment for the next several years.

Opportunities

Tech investors may chase high-flying companies that employ artificial intelligence and ChatGPT through Microsoft ( MSFT ). Unfortunately, traditional technology investors will not view Raytheon as a tech firm. Yet, the company has 13 or more disciplines in its technology roadmap. It will develop the enabling technologies. For example, it will push performance for its product suite. This includes the use of advanced materials, CMCs, and ceramic matrix composites.

Electrification is another major shift in the company's product. It will work on power and thermal management. By pushing its products to the limits, Raytheon may reduce heat waste. The connected battle space would strengthen communication through a high-assurance network.

Risks

Raytheon trades at a high valuation. This reflects the market's bullishness for the defense contractor sector. SA's quant scoring rates RTX stock a buy. Northrop ( NOC ), L3Harris ( LHX ), and Lockheed Martin ( LMT ) only get a "hold" rating:

Among the aforementioned firms, Raytheon has the highest growth score, albeit with a grade of C-.

Your Takeaway

Profit-takers might push Raytheon stock lower after the earnings report. But after Lockheed Martin posted Q1 results beating estimates , markets may have failed to price in Raytheon's strong results.

The war in Ukraine shows no signs of slowing. Ukraine may have a spring offensive against Russia. This does not change the increase in military spending among NATO nations.

Investors should continue to accumulate RTX stock at any opportunity that the share price weakens.

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