Aerospace and defense giant Raytheon Technologies (RTX 0.68%) stock is down 1% in 2022. While that might not seem like anything to write home about, it's still more than a 14% outperformance versus the Dow Jones Industrial index, which is down by double digits this year. Moreover, there's reason to believe Raytheon could deliver solid returns for investors in the coming years. 

The investment case for Raytheon Technologies 

There are three arguments for including Raytheon stock in a portfolio:

  • There's no issue with aviation end demand, with Boeing (BA 1.51%) and Airbus seeking to ramp production, and commercial flight departures continuing to recover
  • The conflict in Ukraine has raised awareness and demand for Raytheon's defense solutions, particularly those used in the theatre of conflict
  • The current economic slowdown has elements in it that will favor Raytheon Technologies 

Aviation end demand 

The arguments above were all strengthened by recent commentary from assorted industrial company leaders. Starting with aviation demand, Raytheon's commercial aerospace-focused businesses (Collins Aerospace and Pratt & Whitney) sell into the original equipment market (OEM) and the aftermarket. The major aircraft manufacturers (including Boeing and Airbus) don't have problems with their backlogs; they have problems delivering on them. For example, Boeing is struggling to stabilize 737 MAX production at 31 a month, let alone increase it. With a backlog of more than three thousand 737s, there's a dire need to increase production. 

As for Airbus, Raytheon CEO Greg Hayes recently said at the Morgan Stanley Laguna Conference that Airbus is currently producing its A320 aircraft at a rate of 48 per month. Hayes believes that will be 65 per month in 2025 (Airbus thinks it can hit 75), and the Boeing 737 at 42-48 in the same year. If Boeing and Airbus hit the rates that Hayes expects in 2025, then "you would see over a 50% increase in OE revenue between Pratt and Collins between now and 2025" according to Hayes.

The aftermarket, driven by increasing flight departures, is also set for strong growth in the coming years. Delta Air Lines President Glen Hauenstein also presented at the Morgan Stanley conference, saying he expected "very robust demand" during the holiday season and "we haven't seen any cracks in our demand set yet." The recovery in flight departures is feeding through into aftermarket demand, with Collins Aerospace aftermarket revenue up 25% in the second quarter and Pratt & Whitney aftermarket revenue up 26%. It's a similar story at Raytheon's rival General Electric, where management expects 20% growth in its aftermarket revenue in 2022.

Defense outlook 

Hayes' recent presentation also raised expectations for growth on the defense side of the business. The official guidance for 2022 calls for low-single-digit growth at Raytheon Intelligence & Space (RIS) and low-to-mid-single-digit growth at Raytheon Missiles & Defense (RMD). In fairness, there's reason to believe it could be a struggle for the defense businesses (particularly RMD). Still, just as with aircraft OEM demand, the biggest problem is overcoming supply chain difficulties to meet demand -- it's not a problem of end demand per se. Indeed, Hayes and CFO Neil Mitchill believe total company defense revenue will grow at a mid-to-high-single-digit rate to 2025. Note that this rate is a significant improvement on growth in 2022. Hayes said there was "an incredible amount of demand" for Raytheon's defense products, partly driven by replenishment of equipment used in the conflict in Ukraine.

Raytheon could benefit from a slowdown

While an economic slowdown is not usually good news for anyone, in one sense, it could bring some relief to a problem area for the aviation industry. Earlier in the year, Boeing CEO Dave Calhoun said the most significant restraint on his suppliers came from the availability of labor. Calhoun argued that a slowdown might be "helpful" in Boeing's recruitment efforts. It's a theme repeated by Hayes when he outlined that, despite hiring 23 thousand people this year, Raytheon still has 13 thousand vacancies, and a slowdown would give Raytheon a "bigger pool of talent to draw from," according to Hayes. In addition, a correction in commodity prices, driven by a slowdown, would help moderate Raytheon's costs.

A stock to buy

All told, both sides of the company are set for good growth going to 2025, and the stock represents an excellent option for investors looking to outperform the market.