Like much of the industrial sector, aerospace and defense giant Raytheon Technologies' (RTX 0.54%) near-term earnings prospects are being challenged by a confluence of negative forces. If it isn't the ongoing impact of the pandemic (in particular, China's severe lockdown response to the latest outbreak), it's the exacerbation of already significant raw material and supply chain issues by the war in Ukraine.

That said, the company's long-term prospects remain excellent, and Raytheon is an attractive stock. Here's why.

Raytheon's first-quarter earnings

It's not difficult to sum up Raytheon's first-quarter earnings report and upgraded full-year outlook. Simply put, management lowered its full-year revenue expectations, primarily due to the loss of commercial aviation revenue from Russia as part of sanctions imposed on that country, but maintained its full-year earnings and free cash flow (FCF) expectations.

A missile being launched.

Image source: Getty Images.

Turning to qualitative assessments, there's little doubt that the risk to Raytheon's earnings outlook is rising as supply chain issues persist. The company, for example, needs to replace titanium castings (for aircraft engines) previously sourced from Russia. In addition, there's ongoing uncertainty around just how long China will continue to impose lockdowns on its economy and travel due to the latest outbreak.

Putting the updated guidance numbers into context, they imply a price-to-earnings (P/E) ratio of 19.5 to 20.3 and a price-to-free-cash-flow ratio of 23.2 for full-year 2022. While these valuations appear on the high side, not least for a company beset by rising near-term earnings risk, they are attractive in terms of the long-term prospects of the business.

Metric

Previous Guidance

Current Guidance

Sales

$68.5 billion to $69.5 billion

$67.75 billion to $68.75 billion

Organic sales growth

7% to 9%

6% to 8%

Adjusted EPS

$4.60 to $4.80

$4.60 to $4.80

Free cash flow

$6 billion

$6 billion

Data source: Company presentations.

Commercial aerospace

The key to the argument rests on the idea that both of Raytheon's end markets are showing underlying signs of improvement.

Starting with commercial aviation, you only have to look at Delta Air Lines' first-quarter earnings to see that passengers are more than willing to fly. While commercial air travel in January and February was hit by omicron-related restrictions, Delta said it had its best "cash sales month in history" in March, and management expects a strong summer.

Another vote of confidence for the industry comes from Delta management's disclosure that business travelers -- the key to airline profitability -- were back and its business travel volumes were at "the highest post-pandemic levels we've seen." If airlines are serving more people and flying more and making more money, Raytheon's commercial aerospace original equipment businesses and its commercial aerospace aftermarket businesses will benefit.

In the near term, Raytheon may well have supply chain issues (the titanium structural casings being a good example), and Boeing and Airbus (two Raytheon customers) may see plans to ramp capacity held back due to supply chain issues. However, the long-term outlook is still good for the industry, which should see a multiyear growth cycle.

An airplane taking off.

Image source: Getty Images.

Defense

It's clear that the escalation of conflict in Ukraine has highlighted the efficacy and relevance of Raytheon's defense offerings. In particular, Raytheon's portable air defense Stinger missiles and portable anti-tank munition, Javelin, are playing prominent roles in the war.

During the earnings call, CEO Greg Hayes was asked about the potential for replacement demand. He responded by saying that it would take time to ramp production, and some of the electronics needed redesigning, but added, "... this is going to be a '23, '24 where we actually see orders come in for the larger replenishments, both on Stinger as well as on Javelin, which has also been very successful in theater."

As such, it's reasonable for Wall Street analysts to start penciling in improvements in the earnings outlook for next year and beyond.

A stock to buy

If you can look beyond the potential negative near-term news flow, Raytheon looks set to grow earnings for many years to come. All told, the recent weakness in the stock price is creating a pretty good buying opportunity in the best defense stock on the market.