Raytheon Technologies (RTX) is the result of a merger between United Technologies and Raytheon Corp., and also factors in the old UTX’s divestiture of its elevator (Otis) and air conditioner (Carrier) businesses, recalls John Eade, an analyst with Argus Research.

That is a lot of moving parts, and it has taken management a while to bring the pieces in line. However, we think that job is now mostly finished, and have more confidence in the company’s results and outlook.

Raytheon Technologies reported 1Q22 results on April 26, 2022. The company reported sales of $15.7 billion, up 4% organically. Along with the results, management updated its outlook for 2022. The company now expects sales of $68 billion (up 6%), adjusted EPS of $4.60-$4.80 and free cash flow of $6 billion (up 20%).

Raytheon Technologies has four primary business segments: Pratt & Whitney (27% of pro forma 1Q sales); Collins Aerospace (29%); Raytheon Intelligence & Space (21%); and Raytheon Missiles & Defense (21%).

RTX’s business mix appears favorable compared to that of most defense industry peers, given its exposure to the rebounding commercial aerospace segment. Technical trends have turned positive, and the company recently raised its dividend by 8%.

We are raising our 2022 adjusted EPS estimate to $4.85 from $4.80. Our estimate is just above the high end of management’s target range and implies growth of 14% for the year. We look for growth to continue in 2023, and are boosting our preliminary adjusted EPS estimate from $5.30 to $5.50. Our five-year earnings growth rate forecast is 9%.

The company has a share buyback plan, and is planning to buy back at least $2.5 billion of its stock in 2022. Earlier this month, the company raised the quarterly payout by 8% to $0.55, or $2.20 annually, for a yield of about 2.0%. Our dividend estimates are $2.16 for 2022 and $2.32 for 2022.

Compared to the peer group, RTX shares are trading in line with or below peer averages on metrics such as P/E and price/sales. Given the greater transparency on the earnings outlook, we think the shares are undervalued. Our target price is now $112.

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