Both stocks give investors exposure to the aerospace and defense market, and Raytheon Technologies (RTX 0.45%) is a major supplier to Boeing (BA -1.87%). So a comparison of the two companies is handy for considering investing in the sectors. With this frame of mind, here's a look at which stock is the better buy right now.
Boeing's self-help story
The investment case for the aerospace giant is based on a self-help story. Management has set a goal of hitting $10 billion in free cash flow (FCF) between 2025 and 2026, and it's the progress toward getting to that target that investors should judge the stock on. To reach the $10 billion, Boeing will need to ramp up production of its 737 airplane from 400-450 in 2023 to 50 a month, or 600 a year. Moreover, it will need to avoid any more costly charges on some of the fixed-price defense contracts it's had problems with in recent times.
Doing so is easier said than done, due to the substantive supply chain issues that negatively impact the industry. That said, key aerospace suppliers like Raytheon and General Electric (the engine supplier on the 737 MAX) are saying conditions are improving, and Boeing's management seems to be taking a cautious approach. Meanwhile, regarding its defense segment, at a recent investor conference CFO Brian West told investors that Boeing took "a pretty big step to derisk those" in 2022 and "while you could never eliminate risk, we did our very best on the very big assumptions to retire as much risk as we could."
There's no guarantee Boeing will hit its expectations, but the commercial aerospace industry remains in growth mode, and Boeing has a backlog of 3,653 Boeing 737 airplanes and 585 Boeing 787 airplanes.
All told, the case for Boeing largely rests on its internal execution, with the usual caveat that commercial aerospace holds up.
In contrast to Boeing, Raytheon is an industrial company with an excellent recent history of internal execution. It's definitely had issues with its supply chain. In particular, its defense-focused businesses suffered in 2022 -- both Raytheon missiles and defense (RMD) and Raytheon intelligence and space (RIS) saw profits decline in 2022 when management started the year expecting improvement in both. However, that was more than offset by better-than-expected profit growth at the commercial aerospace-focused businesses Collins Aerospace and Pratt & Whitney.
The reason for the profit disappointment in the defense businesses comes down to the difficulties in overcoming supply chain issues (component and labor shortages) that hit Boeing, Raytheon, GE and the rest of the aerospace industry in 2022.
However, both of Raytheon's end markets are in growth mode. For example, in commercial aerospace, aftermarket demand is growing, and flight departures continue to recover to 2019 levels. In addition, as we've just seen with Boeing and the original equipment market, airplane manufacturers are pushing hard to ramp up production.
Meanwhile, the conflict in Ukraine and geopolitical tensions in Asia are creating a renewed emphasis on defense spending by the U.S. and its allies. According to Bloomberg, the Biden administration is pushing for a defense budget of more than $835 billion -- more than the current nominal record budget of $816 billion.
It's not just about replenishing equipment supplied to Ukraine; there's an increased awareness of security interests driving Raytheon's defense backlog higher -- Raytheon's overall backlog was $175 billion at the end of 2022.
As such, Raytheon's target of $9 billion in FCF in 2025 looks achievable. Moreover, there's an opportunity for a boost to profitability coming from management's restructuring of its portfolio.
Boeing or Raytheon?
Nothing stops you from buying these attractive stocks, but I think Raytheon is better if forced to choose. That's simply because the downside risk of Boeing missing its 2025/2026 target is more than that of Raytheon missing its target. The reasoning is that both companies operate in long-cycle industries that require billions in investment to develop new aircraft engines (Raytheon) and airplanes (Boeing), and Raytheon's net debt of $25.7 billion at the end of 2022 puts it in a relatively favorable position compared to Boeing's $39.8 billion. In addition, Raytheon earns relatively more money from defense than Boeing, so it has more financial flexibility should the commercial aerospace market turn down.