Raytheon Technologies (RTX) emerged as a leaner aviation giant after the coronavirus pandemic crushed global air travel, executing well in a challenging market. Is Raytheon stock a good buy right now? For the answer, let's take a look at Raytheon earnings and the RTX stock chart.
XRaytheon Technologies arose in April 2020 after defense contractor Raytheon Company merged with industrial giant United Technologies. After carving out Otis (OTIS) and Carrier (CARR) as standalone companies, Raytheon's a pure-play bet on aviation.
The Waltham, Mass.-based company ranks among the top defense stocks, with commercial and military lines of business. It makes jet engines for Boeing (BA) and Airbus (EADSY), as well as the Patriot missile defense system, the Tomahawk cruise missile and radar systems for Lockheed Martin (LMT).
Raytheon Stock Technical Analysis
Shares of Raytheon Technologies are forming a flat base with a 75.42 buy point, straddling the 50-day line, according to MarketSmith chart analysis. Raytheon stock rose 2% on solid earnings Jan. 26 but remains 12% below the entry.
The relative strength line for RTX stock is lagging, not far above decade lows. A falling RS line means a stock is underpeforming vs. the S&P 500 index. It is the blue line in the chart provided.
While Raytheon stock is well off March 2020 pandemic lows, it remains below pre-pandemic highs. In contrast, the major stock indexes have long since taken out pre-pandemic highs.
RTX stock has an IBD Composite Rating of 28 out of a best-possible 99. The Composite Rating combines several key fundamental and technical ratings into a single score. The best stocks often have a CR of at least 95 near the start of big runs.
An RS Rating of 20 means Raytheon has outperformed just 20% of all stocks over the last year. The Accumulation/Distribution Rating of B- show net buying RTX shares by big investors over the past 13 weeks.
The iShares U.S. Aerospace & Defense ETF (ITA) counts both Boeing and Raytheon among its top holdings.
Raytheon boasts solid institutional backing. But the number of funds holding RTX stock fell to 2,050 in December from 2,120 in September.
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Raytheon Earnings And Fundamental Analysis
On key earnings and sales metrics, RTX stock earns an EPS Rating of 29 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.
On Jan. 26, Raytheon beat earnings views for the fourth quarter, despite sharp revenue declines in its commercial aerospace business due to the pandemic. Results were helped by aggressive cost-cutting, including 21,000 job cuts.
Given the Raytheon merger in spring 2020, some analysts on Wall Street focused on quarter-over-quarter results. In Q4, revenue rose 14% sequentially in Raytheon's commercial business. Revenue rose 9% sequentially in its military business.
The sequential growth shows "the merger and the commercial aerospace recovery are progressing well," CFRA equity analyst Colin Scarola wrote in a Jan. 26 note.
In the face of 2020 headwinds, Raytheon managed to generate $2.3 billion in cash. CEO Grey Hayes told CNBC Jan. 26 that the company will "load up" on share buybacks, while backing plans to return $18 billion-$20 billion to shareholders in four years from the merger.
Wall Street expects Raytheon earnings to rebound in 2021. Analysts forecast EPS will increase 15% to $3.45 as revenue rises 4% to $67.05 billion, according to Zacks Investment Research.
Wall Street's growing more bullish about a commercial aerospace recovery as the coronavirus vaccine rolls out, which should get people to fly again. On Jan. 26, Raytheon's jet-engine rival General Electric (GE), predicted an aviation recovery in the second half of 2021.
Over the past three years, Raytheon's earnings per share fell 27% annually and sales fell 9% annually, according to the IBD Stock Checkup. Over the past three quarters, Raytheon earnings per share declined an average 52%. 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 8.4% pretax margin. Its 6.6% return on equity is below the 17% or higher an investor would want to see.
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Boeing 737 Max, Coronavirus Headwinds
Aviation is among the industries hit hardest by the coronavirus pandemic. Raytheon's pivot to becoming an aviation pure-play company coincided with the downturn.
In 2020, profits fell 70% at Collins Aerospace, an avionics supplier, and 78% at Pratt & Whitney, a jet-engine supplier.
Collins supplies the Boeing 737 Max jet, which was grounded around the world after two fatal flights. It could benefit as the Boeing 737 Max returns to service and deliveries resume, after getting certified to fly again.
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 supplier to the storied but aging jet.
The contract will be awarded in mid-2021.
Raytheon's military businesses also include Raytheon Intelligence & Space and Raytheon Missiles & Defense. Those businesses got a jolt last month, when rival Lockheed agreed to buy Aerojet Rocketdyne (AJRD), a key supplier in the missile and space markets as well as a developer of hypersonic technology.
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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.
Key bookings in Q4 2020 included $217 million on the AN/TPY-2 radar program. Raytheon also saw $947 million in classified bookings at Intelligence & Space, and $354 million for a classified program at Missiles & Defense.
Raytheon's missile unit is a leader in hypersonic weapons, a key priority for 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.
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 middling No. 47 out of 197 industry groups tracked by IBD.
Lockheed Martin and Boeing also belong to the group. Other notable members include Northrop Grumman, as well as Mercury Systems (MRCY), TransDigm (TDG) and L3 Harris (LHX).
Virgin Galactic (SPCE) is another top stock to watch. Raytheon itself ranks No. 36 within this group.
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Is Raytheon Stock A Buy?
Raytheon Technologies eyes a return to growth as coronavirus headwinds ease. Commercial aviation could begin to recover in the latter half of this year, though it will likely take years to get back to pre-pandemic levels. Indeed, Raytheon's sharp job cuts suggest this to be the case.
For now, fundamental metrics for RTX remain depressed. Having a mix of commercial and defense businesses should help Raytheon to balance cyclicality. Hypersonic and classified programs could provide a lift in the future, though it's not clear how much they will move the needle for the new company.
Raytheon also doesn't belong to a leading industry group. From a technical perspective, RTX stock remains below a buy point and key support levels. Its relative strength line shows significant lag.
Bottom line: Raytheon stock is not a buy. Instead, put this aviation and defense giant on your investing watch list. A faster-than-expected recovery in global air travel could mean significant upside for the 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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