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Why Raytheon Technologies Rocketed Higher in April

By Lou Whiteman - Updated May 7, 2020 at 4:39PM

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The newest aerospace and defense titan got off to a great start in April.

What happened

Raytheon Technologies (RTX 0.95%), the company formed via the merger between defense contractor Raytheon and the aerospace unit of United Technologies, officially began trading on April 3. The shares got off to a good start, rocketing 19.7% higher as the month went on, according to data provided by S&P Global Market Intelligence.

So what

When United Technologies and Raytheon announced plans to merge in June 2019, the deal was greeted with howls from investors in both companies. United Technologies had built a large and profitable business largely serving the commercial aerospace sector and had benefited from a decade-long surge in new plane orders.

Raytheon, meanwhile, was a defense specialist with exposure to some of the areas deemed most critical to the Pentagon, including missiles, missile defense, and space. Investors, including in United Technologies' case some high-profile activists, balked at the idea of watering down the two pure-play business with exposure to the other side of aerospace.

Illustration of a Raytheon SM-3 interceptor in flight.

Image source: Raytheon Technologies.

Fast forward to present day, and the United Technologies holders have every reason to be glad the deal got done. The COVID-19 pandemic has starved airlines of revenue and threatens to freeze new plane sales for two to three years to come. The airlines have grounded hundreds of planes, meaning less demand for UTC-owned Pratt & Whitney engines and Collins aircraft interior products.

The result is that in a month when many companies with heavy commercial aerospace exposure were under pressure, the new Raytheon Technologies held up well.

Shareholders who owned United Technologies heading into the merger also received shares of the newly formed Carrier Global (CARR 0.95%) and Otis Worldwide (OTIS 1.74%). Those companies, among the best known names in the heating, ventilation, and air conditioning (HVAC), and elevator businesses, were up 33.3% and 15.7% from April 3, respectively.

Now what

Raytheon Technologies reported earnings on May 6, and between the merger accounting and the ongoing pandemic, it's no surprise the results were a mess. They came in ahead of consensus, but the company warned the pandemic was going to cause a serious hit to its commercial revenues and suspended guidance for 2020.

The company's shares have given back some of that April gain so far in May, down 12% for the month through May 6.

Raytheon Technologies has an impressive set of assets, and over time the company should be a winner. But as a general rule, I tend to avoid buying into companies recently formed via megamergers due to the complexities of integration and the chance that something can go wrong. Add in the commercial aerospace slowdown that could take years to play out, and I see no rush to buy into Raytheon Technologies today.

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Stocks Mentioned

Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$97.02 (0.95%) $0.91
Carrier Global Corporation Stock Quote
Carrier Global Corporation
CARR
$36.00 (0.95%) $0.34
Otis Worldwide Corporation Stock Quote
Otis Worldwide Corporation
OTIS
$71.90 (1.74%) $1.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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