Boeing (BA +5.19%) and the company formerly known as Raytheon Technologies, RTX (RTX +3.08%), have much in common. Not only are they both giants in aerospace and defense, but they are each suffering from ongoing supply chain issues and manufacturing quality issues. In addition, they are both value-proposition stocks, with plenty of upside potential and downside risk.
But which stock is the better buy right now?
Boeing and RTX, head to head
Both companies have set out their medium-term outlooks, and naturally, investors will look to pencil them in to try and value the stocks accordingly. I've outlined them in the chart below. It's slightly complicated because Boeing's guidance is for "2025/2026," meaning at some point between the two years, while RTX's is for 2025. As such, you might want to be slightly more generous on the valuation you accept for RTX than Boeing.
That said, it's hard to argue that Boeing looks a slightly better value on this basis. Still, there's a lot more to the story.
|
Company |
Free Cash Flow |
Current Market Cap |
Price-to-Free Cash Flow Based on Current Market Cap |
|---|---|---|---|
|
RTX |
$7.5 billion in 2025 |
$106.4 billion |
14.2x |
|
Boeing |
$10 billion in 2025/2026 |
$117.6 billion |
11.8x |
Data source: Company presentations. Chart by author.
What happens after 2025?
Looking at things positively, if both companies hit these targets, they will be in good shape for robust earnings growth.
For Boeing, management expects to be at a production rate of 50 a month on the 737 MAX and 10 a month on the 787. Given the importance of ramping production to Boeing's margin expansion, hitting those rates implies a higher margin profile, which could increase further as Boeing gets better at reducing unit production costs through building scale. Moreover, Boeing also expects to work through problematic fixed-price military programs to 2025, implying margin expansion in the defense business too.
For RTX, hitting the target implies it would have completed the GTF engine inspections that need to be completed. As a reminder, 600 to 700 of its geared turbofan (GTF) engines need to be removed and inspected due to a quality control issue on powdered metal used to make turbine discs in engines. Management recently outlined that the issue would result in a $1.5 billion hit to FCF. Without it, the FCF target would be $9 billion, and if you use that as an ongoing estimate for underlying FCF, RTX would look like an excellent value.
Image source: Getty Images.
In addition, RTX's defense businesses have robust growth prospects coming from a renewed emphasis on defense spending and the opportunity to grow margins as supply chain issues ease -- something that will also benefit Boeing, for that matter.
What about the downside?
Considering the glass-half-empty view, there's reason to believe there could be a potential downside for both stocks. Both stocks are heavily exposed to commercial aerospace, and an ongoing period of sluggish economic growth could lead to airlines canceling orders or reducing flight departures. Moreover, there's no guarantee that supply chain issues won't extend longer than many expect them to.
Indeed, Boeing is struggling to hit its airplane production targets for 2023 due to quality issues on fuselages from a supplier, and RTX's GTF inspections may not pan out as smoothly as management hopes.
Why RTX is the better buy
While RTX appears to have more significant near-term issues to address, I think it's a better buy than Boeing. The reasoning is that Boeing's downside consequences are far more important than RTX's. The latter is more balanced between defense and aerospace, while Boeing relies more on commercial aerospace.
Moreover, Boeing needs the FCF more than RTX, not least of which to continue paying off the substantive debt (currently at $52.3 billion) racked up during the pandemic. It also needs to find the financing available to fund investment in a new airplane. While Boeing's management has articulated that a new plane won't be in place until 2035 at the least, the fact is that investment in a new plane will start many years before that. An inability to do that would hurt Boeing.
Both stocks are attractive but carry significant near-term risks (Boeing to its 2023 outlook, and RTX with the engine inspections). Still, right now, RTX looks the better buy for longer-term investors.
