I'll cut to the chase: That stock is Raytheon Technologies (RTX -2.40%) as its mix of commercial aerospace and defense businesses continues to make it one of the most compelling companies in the industrial sector. Here's a look at the investment case. But first, a little history.
The creation of Raytheon Technologies
In 2019, United Technologies and Raytheon announced an agreement to merge the former's aerospace business with the latter to create an aerospace and defense behemoth, Raytheon Technologies. At the time, very few investors would have predicted that the defense businesses (nearly all of them part of Raytheon's contribution) would carry Raytheon Technologies through a pandemic that ravaged the commercial aerospace industry.
For an indication of just how bad things were, consider that for the full-year 2019, Pratt & Whitney and Collins Aerospace (the two heavily commercial aerospace businesses from United Technologies) generated a combined $6.8 billion in adjusted segment profit. Then, for full-year 2020 (with the pandemic in full swing), that corresponding figure slumped to just $1.9 billion. Thankfully, the $2.4 billion in segment profit from the defense-focused businesses (Raytheon Missiles & Defense, or RMD, and Raytheon Intelligence & Space, or RIS) helped deliver earnings and cash flow to the company.
It was a pretty similar story in 2021, with the commercial aerospace businesses contributing $2.3 billion in segment profit, and RMD and RIS combined contributing $3.8 billion.
Raytheon Technologies in 2022
The plot thickens. Entering 2022, the investment case for the stock had shifted in line with circumstances. Simply put, investors in Raytheon Technologies were planning on a multiyear recovery in the commercial aviation industry to drive earnings growth. At the same time, RMD and RIS were expected to make much more modest contributions to growth.
A demonstration of this comes from management's full-year guidance, whereby RIS and RMD are forecast to grow adjusted operating profit by $150 million to $250 million in 2022, while Pratt & Whitney and Collins Aerospace are forecast to grow adjusted operating profit by a range of $1.15 billion to $1.4 billion in 2022.
In a nutshell, the outlook was for the solidity of the defense businesses to support more-substantial growth in the commercial aerospace business as the industry gets back to pre-pandemic levels of activity and beyond.
What changed in 2022
While that thesis is still intact, it's undeniable that recent tragic events have highlighted the relevance of Raytheon's defense businesses. The war in Ukraine and the extensive use of Raytheon's Javelin portable anti-tank munition and Stinger portable air-defense systems has raised the profile of Raytheon's defense solutions.
As ever with defense spending, there's an ongoing debate around the type of military equipment governments will allocate money to in the future. Given Raytheon's focus on missiles, missile defense, advanced weapons, space, and intelligence systems, it's likely that it will do relatively well compared to, say, traditional heavy military equipment.
The investment case for Raytheon Technologies
Putting it all together, and as unfortunate as the circumstances behind it are, it's likely that long-term revenue and earnings expectations for Raytheon's defense businesses have been firmed up.
Moreover, the commercial aviation market continues to recover. For example, Pratt & Whitney's rival General Electric (GE -1.62%) recently forecast that the narrow-body market would return to 2019 levels by early 2023 with the wide-body market following a year later.
GE's management believes its aircraft shop visits (when aircraft are serviced) and organic services revenue will be up 25% in 2022, something that augurs well for Pratt & Whitney as well.
Is Raytheon Technologies a buy?
With the prospect of a medium-term recovery, Raytheon's management has guided investors toward a target of $10 billion in free cash flow by 2025. Given the current market cap of slightly less than $150 billion, it's a figure that makes the stock look attractive. Not least because the defense businesses look set for solid growth over the long term, and service revenue generated from the average aircraft engine repair is a multidecade affair.