Anyone unsure about the wisdom of investing in Raytheon Technologies (RTX 0.68%) and other aerospace stocks should have been convinced by the company's fourth-quarter earnings and guidance. It's time to stop thinking about commercial aerospace as a challenged market at the mercy of the pandemic and more as one with a multi-year pathway of growth ahead of it. Meanwhile, Raytheon's defense business will provide solidity through the small ups and downs. It's a compelling proposition.
Image source: Getty Images.
Raytheon Technologies fourth-quarter earnings
The headline results were pretty much in line with the guidance given on the third-quarter earnings call in October. That's a good result under the circumstances, given the supply chain pressures and flight cancellations due to the surge of omicron cases at the end of the year.
Overall full-year sales came in at $64.4 billion, a figure just short of the $65.5 billion guidance, but adjusted earnings per share of $4.27 came in above the guidance range of $4.10-$4.20. Meanwhile, free cash flow (FCF) of $5 billion came in exactly in line with guidance.
The FCF result and guidance for $6 billion for full-year 2022 are significant, as management has set a target of $10 billion in FCF in 2025. Of course, that's a few years away yet, but it helps to highlight the growth potential at the company -- and based on the current market cap, it would put it at a price to FCF multiple of less than 14 in 2025. That would be an excellent multiple for a company with good long-term growth prospects.
Long-term growth toward $10 billion
To hit the 2025 target of $10 billion in FCF, Raytheon will rely on strong growth in its commercial aerospace businesses supported by ongoing earnings and cash flow at the defense businesses.
Image source: Getty Images.
For reference, the commercial aviation-focused businesses are mainly Pratt & Whitney and Collins Aerospace. Raytheon Intelligence & Space, or RIS, and Raytheon Missiles & Defense, or RMD, mainly house the defense businesses.
Combining complementary businesses is essential because it ensures cash flow for investment in businesses that require multi-year investments to develop solutions, such as Pratt & Whitney's geared turbofan (GTF) engine. The GTF (an engine option on the Airbus A320 NEO family of aircraft) required years of investment but is now set to generate decades of profit through aftermarket revenue.
Raytheon's guidance for 2022 fits into the game plan, and it illustrates the strength of the recovery in commercial aerospace. Note that the commercial aerospace businesses are now generating the overwhelming bulk of the marginal increase in profit.
That guidance is supported by General Electric's (GE 1.30%) aviation segment outlook for 20% growth in 2022. Indeed, GE Aviation's spares rate (highly profitable commercial spare parts shipped to customers) surged 36% to $23.8 million a day in the fourth quarter on a year-over-year basis. It was a similar story at Raytheon, with fourth-quarter commercial aftermarket sales at Collins Aerospace up 47% year-over-year and Pratt & Whitney commercial aftermarket sales up 28% on the same basis.
|
Guidance for Full-Year 2022 |
Organic Sales Growth |
Adjusted Operating Profit Growth |
|---|---|---|
|
Collins Aerospace Systems |
Up low double digits |
$650 million to $800 million increase from full-year 2021 profit of $1.8 billion |
|
Pratt & Whitney |
Up low double digits |
$500 million to $600 million increase, from full-year 2021 profit of $490 million |
|
Raytheon Intelligence & Space |
Up low single digits |
flat to $50 million increase, from full-year 2021 profit of $1.6 billion |
|
Raytheon Missiles & Defense |
Up low to mid-single digits |
$150 million to $200 million increase, from full-year 2021 profit of $2 billion |
Data source: Raytheon Technologies presentations.
Excellent management team
Another reason to have confidence in Raytheon's earnings trajectory comes down to the track record of its management team. It's not easy integrating multi-billion dollar acquisitions at the best of times, let alone in the middle of a pandemic that severely impacted the aviation industry. However, Raytheon's management team is ahead of schedule on not one but two of them.
First, the integration of United Technologies' acquisition of Rockwell Collins in 2018, and then the merger of the former United Technologies aerospace business with Raytheon Company in 2020.
Image source: Getty Images.
During the earnings call, CEO Greg Hayes noted that "we achieved about $760 million in incremental cost synergies from the RTX merger, bringing us to over $1 billion since the completion of the merger in April of 2020." Meanwhile, the Rockwell Collins merger "achieved over $600 million in total Rockwell-Collins synergies since the acquisition in November of 2018."
Looking ahead
Given the commercial aerospace industry's reliance on an improvement in the pandemic, it's unlikely to be smooth sailing for Raytheon Technologies in 2022. Still, investing in the aerospace recovery isn't a question of a quarter's earnings. Instead, thinking more long-term, it's a question of when, not if, the industry recovers to 2019 levels and beyond. As such, Raytheon remains one of the best reopening stocks to buy for 2022.
