When commercial aerospace giant United Technologies combined with defense specialist Raytheon in April 2020, the rationale for the deal was that the two companies together would be less vulnerable to cyclicality than either was on its own.
The new Raytheon Technologies (RTX 0.98%) demonstrated the value of diversification in the first half of 2022, with its stock climbing 11.7%, according to data provided by S&P Global Market Intelligence, in a period when the S&P 500 was down 20.6%. It was the defense side of the business that carried the day, with commercial aerospace actually underperforming the broader index.
In a first half where little went right for stocks, the defense sector was the beneficiary of a grim catalyst. Russia's invasion of Ukraine has both rejuvenated Western resolve and, along with it, provided a likely boost to weapons sales, with demand for shipments to Ukraine. The legacy Raytheon business was a missile specialist, with an arsenal that includes co-production of the Javelin anti-tank missile that has been a big part of Ukraine's defense.
Absent the Raytheon contribution, a commercially-focused company would have likely done far worse. United Technologies prior to the merger got the bulk of its aerospace revenue from commercial aviation, including Pratt & Whitney engines and Collins interiors. The Ukraine war and the resulting spike in oil prices have cast doubt on airline spending for new planes, causing commercially-focused companies like Boeing to fall more than 30% in the first half of the year.
Raytheon actually outperformed the broader SPADE Defense Index in the first half of the year, implying there is more going on here than the Ukraine war. Indeed, prior to the invasion, the company was already showing signs that the merger was paying off.
It reported stronger-than-expected first-quarter earnings back in April, and has a backlog of more than $150 billion in future business that investors can focus on if worried about near-term commercial demand. Much of that was booked by the commercial business, which appears set up well for the long haul even if the near-term outlook is cloudy.
Mergers are a tricky subject for investors, because a lot of deals never fulfill the promise that management sees when announcing the transaction. But by all accounts, the combined Raytheon Technologies seems to be coming together nicely, and investors have reason to believe this company can continue to outperform the markets over time.