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  • Raytheon Technologies Stock: +23.40% Yield Potential with Recovering Aerospace Industry and Larger Military Order Share

Raytheon Technologies Stock: +23.40% Yield Potential with Recovering Aerospace Industry and Larger Military Order Share

Company Name: Raytheon Technologies
Ticker symbol: RTX.US
Entry price: $77
Target price: $95
Potential: 23.40%
Projected Dividend Yield: 2.45%
Horizon: 3–6 months
Risk: high
Position: 2%

About Raytheon Technologies

Raytheon Technologies Corporation (RTX.US) is a US based multinational focusing on aerospace and military industry, which also includes intelligence solutions. In particular, Raytheon supplies aviation engines and constructions, cyber security solutions, missiles, air defense systems, and drones, all based on the latest technologies available in the market. The company has multiple military supply contracts and gets a good deal of earnings out of the US government orders.

What's the Idea?

The stock may rise with the United Technologies merger and more orders coming from the US military organizations.

Buy Raytheon Technologies Shares >>

Why Trade Raytheon Technologies?

Reason 1: More Military Spending with Rising Number of Local Conflicts

The number of local military conflicts is increasing throughout the word, the latest being as follows:

  • ISIS insurgency in Iraq, 2017
  • US-Iran conflict, 2019
  • Military conflict in Nagorno-Karabakh, 2020
  • India-China border conflict, 2020
  • Ethiopia-Sudan border conflict, 2020
  • Current Tensions in Donbass, 2021

In some conflicts, the United States were either involved or had an indirect interest. The tensions are growing, and many countries are steadily increasing their military spending. As the Stockholm International Peace Research Institute (SIPRI) reports, the global defense spending rose from $1.60T in 2010 to $1.92T in 2019, with a rise of 2.30% per year.

The US spends more funds on military maintenance than any other country, the costs amounting to $740B. NATO member states, where the US has its interest as well, are also steadily increasing their military budgets. Although the Democrats won the latest US election, military spending is likely to continue rising, as Biden already started the process to approve of increasing the defense budget by 1.70% to $753B.

Raytheon Technologies can well capitalize on this trend, as a significant share of its earnings come from the US military orders. In April 2020, Raytheon Technologies concluded a profitable merger with United Technologies, thereby significantly expanding its own share in the military product market and increasing its portfolio of military orders.

By late 2020, its outstanding value of contracts (Defense Backlog) amounted to $67.30B. The United Technologies merger will help Raytheon Technologies increase its market share and, most likely, get more large government orders. This also secured a good financial condition for Raytheon last year, despite the slumping aviation earnings and less contracts with businesses.

The increasing global tensions and the US military budget being expanded will not only help Raytheon Technologies maintain its business and stable cash flows, but also increase the company's backlog and earnings.

Reason 2: Aviation Industry Boost with Gradual Border Opening

Last year, the pandemic hit the Raytheon aviation business, which is operated by Collins Aerospace and Pratt & Whitney, its subsidiaries. Over the year, the sales declined in total by 23.1-%, while the operating income plunged by as much as 85%. This happened due to the following reasons:

  • Fewer flight hours and, accordingly, less use of aircraft by airlines
  • Less original equipment manufacturer (OEM) goods produced for other brands
  • Boeing737 MAX court proceedings

Despite this, the company's management expects a gradual aviation industry recovery over the next three years, and this is very well justified, since many countries are already using vaccines, and the air traffic may soon start getting restored.

In addition, the Boeing 737 MAX scandal is fading out, as The European Aviation Safety Agency (EASA) and the Federal Aviation Administration (FAA US) finally lifted the ban, and some airlines already started ordering this aircraft model again. This will, most likely, help Raytheon further develop its aviation activities.

Reason 3: Financial Performance and Positive Outlook

2020 proved to be complicated for Raytheon, but thanks to the merger and government military orders, the company successfully compensated for the drawdown in the aviation sector. The adjusted annual earnings amounted to $57.10B, and while the adjusted operating income was at $4.20B, and the operating margin across all segments reached 7.30%. The results are adjusted in order to exclude the Goodwill revaluation as a result of the M&A.

Raytheon currently has a huge backlog, with a total value of $150.10B, $82.80B accounting for commercial aerospace and $67.30B, for defense. After the merger with United Technologies, the company maintains strong financial performance and has a moderate debt burden of $31.80B, the liquid funds amounting to $8.80B, and the net debt to EBITDA ratio hitting 2.7x, which is quite an acceptable number. The free cash flow (FCF) is positive and amounted to $3.50B over last year.

The outlook for 2021 by the Raytheon management is also quite positive, with the earnings expected between $63.40B and $65.40B, the EPS, at $3.40 to $3.70, and the FCF, at $4.50B. The CapEx is also expected to go up, from $1.80B to $2.50B.

Currently, Raytheon's dividend yield amounts to 2.45%. There is also a buyout program worth $5B, out of which $1.5B should be raised in 2021.

The ratios are currently very promising:

  • EV/S: 2.46x
  • Forward/S: 2.18x
  • P/FCF: 33.71x
  • Forward P/FCF: 26.22x
  • Forward PE: 15.10x

In case the expectations for 2021 are met, Raytheon stock may well continue rising over the current year.

In April 2021, various investment institutions and banks raised their target price outlook for Raytheom as follows:

  • Wolfe Research: $97
  • Susquehanna Bancshares: $91
  • Credit Suisse Group: €90

How to take advantage of the idea?

  1. Buy Raytheon Technologies stock at $77.
  2. Allocate no more than 2% of your portfolio for the purchase. To build a balanced portfolio, you can use the recommendations by our analysts. 
  3. Sell the stock when the price reaches $95.

How to Buy Raytheon Technologies?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type RTX.US (Raytheon Technologies ticker in the NASDAQ) in the search box, and select Raytheon Technologies in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type RTX.US (Raytheon Technologies ticker in the NASDAQ) and select Raytheon Technologies in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.

Buy Raytheon Technologies Shares >>

*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.