Raytheon Technologies (RTX) is an aerospace and defense company that provides advanced systems and services for commercial, military, and government customers worldwide, notes Joe Laszewski, CFA, CPA and senior portfolio manager at Stack Financial Management.

The company formed in 2020 through the combination of Raytheon Company and the United Technologies Corp. aerospace businesses. 

With four business segments ― Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense ― RTX delivers industry-leading solutions in avionics, aircraft engine design and manufacturing, cybersecurity, and hypersonic missile systems. 

Raytheon Technologies combines the backbone of a high-quality defense contractor with a more cyclical commercial aerospace business — creating an appealing combination of both defensive structure and cyclical upside. 

Defense currently accounts for approximately 60% of total revenues, and RTX achieved a record order backlog last quarter.  Conversely, the aerospace business accounts for 40% of total revenues today. 

While commercial aerospace has been severely challenged by the COVID-19 pandemic, this has also created an attractive long-term opportunity, and RTX’s Pratt & Whitney segment was able to increase market share by more than 10% this year due to its superior balance sheet and ample cash position. 

Although the commercial aerospace business is not expected to fully recover until 2023, the successful rollout of multiple COVID-19 vaccines could begin to significantly revive commercial demand by the second half of 2021. 

Raytheon shares trade well below their median price-to-cash-flow multiple of the past decade and have substantial upside should we see a faster return to normalcy in the commercial aerospace industry.

Even in a slow recovery scenario, RTX shares have attractive upside based on forward cash flows, and a focus on cost cuts and merger synergies should help drive shareholder returns while the demand environment recovers.

In the meantime, RTX offers a solid dividend yield of 2.7% and a strong balance sheet backed by relatively durable cash flows and earnings growth on the Defense side of the business.  

At Stack Financial Management, we analyze stocks using four key factors: Value, Growth, Quality, and Technical. Utilizing these four components, we create a proprietary score which ranks stocks on a relative basis.  RTX ranks high today primarily due to its strong value characteristics. 

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There is still a lot of downside priced into RTX.  However, cash flow generation continues to impress, and the company’s ability to cut costs, resume share buybacks, and benefit from further economic reopening in 2021 makes RTX a compelling Value opportunity moving forward.   

Disclosure: It should not be assumed that future performance of any specific investment, including the above, will be profitable, equal any historical performance level, be suitable for your portfolio or individual situation, or prove successful. Clients and individuals associated with Stack Financial Management may hold positions in and may, from time to time, make purchases or sales of this security. Please see full disclosure information on our website (link below).

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