Aerospace giant Raytheon Technologies (RTX 1.32%), heating, ventilation, and air-conditioning company Carrier Global (CARR 1.84%), and electrical products company nVent Electric (NVT 1.37%) raised their full-year guidance recently and served notice to investors that their medium-term growth prospects are excellent. As such, they are three stocks that investors should seriously consider adding to their portfolio. Here's why.
Three factors came into consideration during the recent earnings season:
- The year-over-year comparisons were easy because the second quarter came up against the pandemic-hit quarter of 2020 when COVID-19 spread around the world.
- Rising raw material prices and supply chain inefficiencies (related to the lingering impact of the pandemic) have led to greater-than-expected cost headwinds for many companies.
- Many industrial companies reported better-than-expected sales momentum and are looking to raise prices to offset cost increases.
Building on the first point, it's important not to get too excited by the surging sales growth reported in the second quarter. So instead, let's focus on the question of whether the increased sales and the companies' price/cost actions will be enough to offset the raw material cost increases.
During upswings in the economy, it's common for companies to report good sales growth and then translate it into an increased profit margin, and therefore major profit increases. Unfortunately, a lot of the expected material and cost increases are eating into the margin expansion this time around.
That said, Raytheon, Carrier, and nVent are all doing a good job dealing with the circumstances. As you can see below, all three raised full-year sales guidance and significantly hiked earnings guidance.
|Company||Full-Year Sales Guidance||Previous||Full-Year Adjusted Earnings-per-Share Guidance||Previous|
$64.4 billion to $65.4 billion
|$63.9 billion to $65.4 billion||$3.85-$4.00||$3.50-$3.70|
In addition, they all have excellent medium- and long-term growth opportunities.
The company offers investors exposure to a recovery in commercial aviation markets through its Collins Aerospace (aerostructures, avionics, cabins, seating, mechanical systems, etc.) and Pratt & Whitney (aircraft engines and parts) segments. Meanwhile, Raytheon's defense businesses (Raytheon Missile Defense and Raytheon Intelligence & Space) will provide solid earnings and cash flow to support the commercial aviation business.
The latter is a key point because aviation tends to be a long cycle business and requires significant upfront investment (in, say, aircraft engine development) projects before they generate earnings and cash flow.
CEO Greg Hayes expects Raytheon to grow its free cash flow (FCF) from $4.5 billion to $5 billion in 2021 as the recovery kicks in, leading to at least $10 billion in 2025. That figure would make the stock look very attractive, given that Raytheon's current market cap is only $129 billion.
By then, the commercial aviation market should have fully recovered to at least 2019 levels, and investors can look forward to a steady stream of earnings from aftermarket parts on Pratt & Whitney's engines, and Collins Aerospace aftermarket and original equipment manufacturer parts. All told, Raytheon is the most exciting stock in the aerospace sector.
The company's separation from the former United Technologies in 2020 has enabled its management to pursue a two-pronged strategy of refocusing on a growth opportunity in HVAC and aggressively cutting costs. As such, Carrier's management is investing in its digital solutions to improve its higher-margin service offering.
In addition, Carrier is looking to take advantage of increasingly stringent carbon emission regulations encouraging building owners to retrofit HVAC systems. Meanwhile, the COVID-19 pandemic raised awareness of the benefits of ventilation in buildings, and vaccine distribution created new demand for refrigerated transport.
Meanwhile, Carrier's management recently agreed to sell its Chubb fire and security business for $3.1 billion and is looking to make acquisitions in the HVAC space. As such, Wall Street analysts expect Carrier to grow FCF from $1.9 billion in 2021 to $2.3 billion by 2023. Moreover, with a current market cap of around $50 billion, it would put Carrier on a reasonable price-to-FCF multiple given its double-digit FCF growth prospects.
nVent's electrical products (enclosures, electrical and fastening systems, thermal management) protect and connect electrical equipment. They aren't glamorous or high-ticket products, but they are essential to the electrification of the economy. That's something that looks assured given the massive investment in electric vehicles, smart grids, renewable energy, connected buildings, data centers, telecom infrastructure, etc.
As such, nVent gives investors a backdoor way to play the electrification theme. Since it trades on less than 18 times Wall Street estimates for FCF in 2021, nVent is an excellent value option.