With the U.S. and its allies having just wound down a 20-year war in Afghanistan, it seemed that a slowdown in defense spending might be in the offing. But now, shares of major defense contractors are soaring again as a result of Russia's invasion of Ukraine, and NATO countries' commitments to send supplies and war materiel to aid in its defense.
Poland's briefly floated plan to send its Soviet-era MiG-29 fighter jets to Ukraine now in exchange for U.S.-made replacements later could have been an interesting development for Boeing or Lockheed Martin (LMT -0.87%), as they're principally responsible for some of today's biggest fighter jet contracts. But in my view, Raytheon Technologies (RTX -0.72%) is the best defense stock to buy now and in the future, even ignoring the impact of the war in Ukraine.
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The bullish case for Raytheon today
More than a few people expected Russian forces to roll right over Ukraine's military, but the smaller country has put up a fierce defense. In fact, while the Russians are still advancing slowly along some fronts, Ukrainian forces have the Russian war machine quite bogged down in many areas.
Ukrainians have been making effective use of Javelin anti-tank missiles, developed jointly by Raytheon and Lockheed, against the invading army.
The fire-and-forget guided system is light enough to be carried by a single soldier, and is deadly accurate at a distance of over a mile and a half, making it a superb tool for thwarting advancing tanks in urban settings.
Missile defense systems are high-priority items for militaries globally; Raytheon also makes the Patriot missile system, and in partnership with Northrop Grumman is developing air-launched hypersonic cruise missiles under a program dubbed HAWC (Hypersonic Air-breathing Weapon Concept).
Raytheon's missile and defense (RMD) segment serves as a prime contractor or major subcontractor on numerous Defense Department programs.
Image source: Raytheon Technologies.
The bullish case for the Raytheon of tomorrow
The longer-term bullish thesis for Raytheon is certainly aligned with the argument for favoring its stock today, but it goes far beyond just the beating of war drums.
While the defense contractor's sales to the U.S. government are responsible for 48% of its annual revenue, sales to foreign customers comprise another 38% (government contracts account for about half that) . RMD is actually one of the smallest of Raytheon's segments in terms of sales -- just $15.5 billion -- but it is the most profitable, generating over $2 billion in operating profits.
Raytheon is a diversified contractor, and its biggest moneymaker is its Collins Aerospace segment, which provides products and services for both military and commercial aircraft. Among the systems it develops are avionics and communications, electric power generation, flight control, air data and sensing systems, and even food and beverage prep. It also makes space suits and sensors for astronauts.
Collins brought in almost $18.5 billion in revenue in 2021, and operating profits of nearly $1.8 billion -- 29% of Raytheon's total operating profits.
Unlike Lockheed Martin, which relies on the federal government for almost 100% of its revenue, Raytheon's diversification gives it flexibility and allows it to avoid some of the big swings that follow whenever the growth rate of the U.S. defense budget slows.
You could probably throw a dart at a board labeled with defense contractor stocks and hit a winner these days, but for investors who are taking a long-term view that looks beyond current conflicts, Raytheon Technologies looks like a winner.
