Raytheon Technologies (RTX) has rebounded as investors look ahead to the aviation sector’s recovery in 2021 while Boeing’s (BA) 737 Max returns to service. Is Raytheon stock a good buy right now? For the answer, let’s take a look at Raytheon earnings and the RTX stock chart.
Raytheon Technologies arose in April after defense contractor Raytheon Company merged with industrial giant United Technologies.
United Technologies separated its Otis elevator and Carrier air conditioner units earlier this year, prior to merging with Raytheon.
The new Raytheon stock was booted from the Dow Jones index Aug. 31, making way for Honeywell (HON), in a reshuffling of the blue-chip stock index.
The Waltham, Mass.-based company ranks among the top defense stocks. It makes jet engines for Boeing and Airbus (EADSY), as well as the Patriot missile defense system, the Tomahawk cruise missile and radar systems for Lockheed Martin (LMT).
Raytheon comprises four businesses: Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense.
Raytheon Stock Technical Analysis
After a rally off coronavirus lows, shares began to consolidate in June. Raytheon stock now sits 6% below a 75.03 buy point in a base within a larger pattern, according to MarketSmith chart analysis. It is back above the 10-week and 40-week lines.
The relative strength line for RTX stock is lagging, near decade lows. A falling RS line shows a stock is underperforming vs. the S&P 500. It is the blue line in the chart provided.
RTX stock has an IBD Composite Rating of 33 out of a best-possible 99. The Composite Rating combines several key fundamental and technical ratings into a single score. The best growth stocks often have a CR of at least 95 near the start of big runs.
An RS Rating of 33 means Raytheon is in the bottom third of all stocks in terms of relative share price performance over the last year. The Accumulation/Distribution Rating of B reflects moderate buying by institutions over the past 13 weeks.
The iShares U.S. Aerospace & Defense ETF (ITA) counts both Boeing and Raytheon among its top holdings. The ITA ETF ran up sharply in 2017 but has underperformed this year.
Raytheon boasts solid institutional backing. But the number of funds holding RTX stock fell to 2,266 in September from 2,448 in June.
Raytheon Earnings And Fundamental Analysis
On key earnings and sales metrics, RTX stock earns an EPS Rating of 24 out of 99, and an SMR Rating of B, on a scale of A+ to E, with A+ the best. The EPS rating scores a company’s earnings growth vs. other stocks, and its SMR Rating measures sales growth, profit margins and return on equity.
Raytheon earnings fell sharply in Q3 but beat Wall Street estimates despite weak sales. The company took significant cost-cutting and cash-conserving actions. The collapse in global commercial air travel and the Boeing 737 Max crisis have weighed on earnings, and thus on Raytheon stock.
In Q3, Collins Aerospace parts sales dropped 34%. Pratt & Whitney jet engine sales also fell 34%. The defense business remains robust, Raytheon said. It generated $1.23 billion in free cash flow.
Raytheon, like customer Boeing and jet-engine rival General Electric (GE), predicts a slow aviation recovery from the deadly virus outbreak.
When Raytheon reports Q4 figures, analysts expect EPS to slide 62% and revenue to fall 17%, according to Zacks Investment Research. Wall Street sees Raytheon EPS crumbling 64% in all of 2020, then rebounding 22% in 2021.
Over the past three years, Raytheon’s earnings per share fell 13% annually and sales fell 4% annually, according to the IBD Stock Checkup. Over the past three quarters, Raytheon earnings per share declined an average 39%. Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. Raytheon falls short on both counts.
On other key fundamental metrics, Raytheon Technologies has a lackluster 8% pretax margin. Its 14% return on equity is below the 17% or higher an investor would want to see.
Boeing 737 Max, Coronavirus Headwinds
Aviation is among the industries hit hardest by the coronavirus pandemic. Raytheon’s pivot to being an aviation pure-play company coincided with the downturn.
Profits at Collins Aerospace fell 58% in the first nine months of 2020 due to the collapse in commercial air travel. Collins makes avionics systems. It also supplies the Boeing 737 Max jet, which was grounded around the world after two fatal flights.
But in early December, the Boeing 737 Max returned to service and deliveries resumed, after it was certified to fly again in November.
Collins, Raytheon’s largest segment by revenue, includes the $30 billion Rockwell Collins acquisition in 2018.
In the first nine months of 2020, Pratt & Whitney swung to a $597 million loss.
On Oct. 27, Raytheon CEO Greg Hayes said the company will cut 20,000 positions. The prior month, he announced more than 15,000 job cuts, which at the time was nearly double a July estimate.
Most of the cuts will come from Pratt & Whitney and Collins Aerospace. Raytheon is also cutting 20%-25% of its office space, up from initial plans for a 10% cut, as more employees are expected to work from home even after the pandemic ends.
Meanwhile, Raytheon’s vying with General Electric and the U.K.’s Rolls-Royce to replace 608 engines on the Air Force’s B-52 bomber jets, a contract worth billions. Raytheon’s Pratt & Whitney is the incumbent engine supplier to the storied but aging jet.
The contract will be awarded in mid-2021.
Hypersonic Weapons, Classified Investment
Raytheon’s military units continue to perform well amid the coronavirus, shielding the company overall. Raytheon Intelligence & Space as well as Raytheon Missiles & Defense are not seeing pay cuts and job cuts.
In Q3, notable bookings included:
- $186 million on the Army Navy/Transportable Radar Surveillance-Model 2 radar program for the Kingdom of Saudi Arabia at Raytheon Missiles & Defense
- $928 million on a number of classified programs at Raytheon Intelligence & Space
- $473 million in F-135 bookings at Pratt & Whitney
- $320 million at Collins Aerospace tied to services for NASA’s Extra Vehicular Activity program
Meanwhile, hypersonic weapons are among the top priorities at the Pentagon. China and Russia have demonstrated their own superfast weapons, which fly five times faster than the speed of sound in an unpredictable flight path, evading any existing defenses.
The Defense Department has several hypersonic programs in the works, spreading billions of dollars around to its top contractors. For example, Lockheed Martin and Raytheon are working on separate Tactical Boost Glide (TBG) weapons, a DARPA-Air Force tandem effort.
The merger should also boost Raytheon’s hypersonic weapons technology, and Raytheon is looking at hypersonic weapon defense as well. Overall, Raytheon has been bullish on such classified Pentagon programs, a potential boost for Raytheon stock for years to come.
Developing replacements for legacy weapons is another top military priority. In April, the U.S. Air Force selected Raytheon for a contract potentially worth $10 billion to develop the Long-Range Standoff weapon (LRSO), a next-generation nuclear cruise missile to be launched from strategic bombers, such as Northrop Grumman‘s (NOC) forthcoming B-21 stealth bomber.
RTX Stock Rivals
Raytheon Technologies belongs to the aerospace-defense group, which ranks a mediocre No. 95 out of 197 industry groups tracked by IBD.
Virgin Galactic (SPCE) is another top stock to watch. Raytheon itself ranks No. 30 within this group.
Is Raytheon Stock A Buy?
In the near term, Raytheon Technologies is poised for more earnings pain, but it should return to growth thereafter.
A mix of commercial and defense businesses should help Raytheon balance cyclicality. And hypersonic and classified programs could provide a lift in the future, though it’s not certain how much they will move the needle for the new company.
From a technical perspective, RTX stock remains below a buy point though it’s back above key support levels. The relative strength line moved steadily lower in 2020 after moving sideways for years, which is not a great sign.
Meanwhile, commercial aviation’s recovery could take years to fully recover to pre-pandemic levels. Indeed, Raytheon’s recent job cuts suggest this to be the case. The aerospace and defense industry group to which Raytheon Technologies belongs also is lagging.
Bottom line: Raytheon stock is not a buy. While shares have formed a base, they are below the buy point and key fundamental metrics remain depressed. But it’s one for your investing watch list, because a faster-than-expected recovery in global air travel could mean significant upside for this former Dow stock.
Investors looking for other top stocks to buy should focus on companies with superior earnings and strong stock performance, such as those on the prestigious IBD 50 list.
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