Parking cash in "buy and forget" stocks usually means buying into businesses with excellent and predictable long-term prospects. In that vein, let's explore defense and aerospace company Raytheon Technologies (RTX -4.23%), diversified industrial Honeywell International (HON -1.73%), and German industrial giant Siemens (SIEGY -3.39%) as great options for investors.
The case for buying Raytheon is simple: Its space and defense businesses (defense and missile systems, intelligence and space systems, electronic warfare) are exposed to favorable spending trends in global defense budgets. As such, the defense businesses will support the company while its businesses that are focused on commercial aerospace (Collins Aerospace and Pratt & Whitney) embark on a multiyear recovery.
In other words, the downside to the stock is protected by the defense businesses, while the commercial aerospace businesses offer long-term growth prospects. To give investors a flavor of the growth potential, during the last earnings call, CEO Greg Hayes said Raytheon's free cash flow (FCF) would "continue to grow over the next several years back to that $8 billion to $9 billion that we had forecast."
Putting these figures into context, Raytheon's current market cap is around $118 billion, so those FCF figures would put Raytheon on a future price-to-FCF multiple of 13.1 times to 14.8 times.
It will take time for Raytheon to get there, and investors will need to be patient. Indeed, Hayes believes it won't be until 2023 that air traffic returns to the levels set in 2019. But when air traffic does get back to previous levels, investors are likely to be holding a company generating substantive amounts of earnings and FCF.
Moreover, Collins Aerospace (aerostructures, avionics, interiors, mechanically actuated systems) sells into some key airplane programs, including the Airbus A320 NEO, 220, and 350, and the Boeing 787 and 777X. Meanwhile, Pratt & Whitney (commercial, business, and military engines) has long-term growth potential from selling aftermarket products and services on its geared turbofan engine on the Airbus A320 NEO.
It all adds up to an attractive proposition for long-term investors.
The investment case for the German industrial giant (which can be bought through a U.S listing) highlights the shift in its portfolio focus. The company is moving toward the exciting areas of factory/process automation and industrial software (within its digital industries segment) and smart building, digital grid solutions, and building products and controls (through its smart infrastructure segment).
Both segments benefit from the increased adoption of digital technologies. For example, using web-enabled devices in factory automation allows companies to use Internet of Things (IoT) technologies to model their physical assets to run them better digitally. Similarly, smart infrastructure incorporates digital technologies allowing building owners and electrical grid owners to manage their assets more efficiently.
Meanwhile, Siemens has a rail infrastructure and a rolling stock business (its mobility segment), and a 75% stake in Siemens Healthineers, which provides solid earnings and cash flow when the economy slows. The latter is an independently listed company and one of the world's leading medical imaging companies. It's a good mix of growth and stability.
Wall Street analysts have Siemens generating FCF of 6 billion euros ($7.07 billion) in 2021 and 6.5 billion euros in 2022. Based on the current market cap of 110.1 billion euros, Siemens trades on 18.4 times 2021 FCF and less than 17 times 2022 FCF. Those are excellent valuations for a company with a mix of businesses that should enable growth across various market conditions.
In common with Raytheon Technologies, Honeywell has heavy exposure to a commercial aviation recovery.
Similarly, Honeywell also has substantial exposure to military spending and the fast-recovering business aviation (private business jet) market. Both markets (military and business jet) will support the commercial aerospace business as it embarks on a recovery in 2021.
But the company is so much more than a play on aerospace. Like Siemens, Honeywell's building technologies segment benefits from the trend toward smart-building solutions. The safety and productivity solutions segment has a fast-growing warehouse automation business (used extensively in e-commerce warehousing) and a sensing and IoT solutions business.
Meanwhile, the performance materials and technologies segment could surprise on the upside in 2021 as industrial production expands and higher energy prices potentially loosen up budgets for Honeywell's process solutions business.
The mix of businesses in the company's portfolio ensures excellent long-term growth prospects. Trading on 28 times estimated 2021 FCF and 25.5 times estimated 2022 FCF, Honeywell isn't a cheap stock. That said, it is a good option for investors looking for a high-quality stock to hold over the long-term.