RTX:NYSE

The views expressed below are those of Anchor Capital Advisors, LLC (“Anchor”) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

RTX:NYSE

MSCI ESG Ratings: A

Raytheon Technologies is an aerospace and defense company that provides advanced systems and services for commercial, military and government customers worldwide. Key products and capabilities include aircraft engines, aerostructures, avionics, aircraft interiors, cyber and data analytics, missile defense, mission systems, weapons systems and sensors and mission systems.

Raytheon Technologies formed in 2020 through the combination of Raytheon Company and the United Technologies Corporation aerospace businesses. The company operates four business segments that are organized based on the nature of the products and services they offer: Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense. Raytheon Technologies is headquartered in Waltham, Massachusetts and employs ~195,000 people of which ~60,000 are engineers.[1]

Investment Thesis

We believe Raytheon is a high quality company that is significantly leveraged to commercial aerospace recovery. The stock has underperformed the market over the twelve months as the pandemic caused global travel to a near halt.[2] As the vaccine rollout picks momentum, we expect global travel to gradually pickup, helping companies like Raytheon.

Raytheon has been able to weather the storm better that some of its peers as it has the benefit of a having stable defense business along with commercial aerospace. The merger between United Technologies and Raytheon created the second largest Aerospace and Defense companies in the United States, after Boeing.[3] Through the combination of its supply chain, procurement activities, and facility consolidation, we believe RTX can generate significant cost synergies.

With strong free cash flow generation ability, we believe RTX is able to it weather the current pandemic related crisis better than its peers and is well positioned for a recovery.

Confirmation through Research

Raytheon has a diversified business model that helps the company weather the current crisis better than its peers. Defense business, a very steady business accounts for almost half the revenues and 30% of the revenue comes from aerospace aftermarket, which is highly lucrative.[4]

However, about 20% of the revenue comes from commercial and aerospace OEM business. As one of the largest producers of engines for commercial airlines, Raytheon’s business was severely impacted during the pandemic as global travel came to a standstill. Boeing, one of its largest aerospace customers, was also hit with the issues around 737-MAX, where the production was completely stopped last year.[5]
Nevertheless Boeing’s MAX has been recertified and vaccine rollout is bolstering airlines confidence to place orders again. As aviation recovers, we expect airlines to grow capacity by increasing utilization of the current fleet and start adding newer more efficient planes to their ageing fleet.

Total revenue for Raytheon declined by 26% in Q4 2020, driven by impact of current crisis on its commercial business. Revenue for Pratt & Whitney division declined by 21% and Collins Aerospace declined by 31%.[6] The company also guided to a free cash flow of $4.5 billion for 2021. These results were better than the consensus expectations, helping reinforce our view that RTX has weathered the current storm well and is well positioned for a recovery.

Variant Perception

Raytheon provides a levered play to the recovery while also enjoying a strong defense backdrop, helping its ability to generate free cash flow even during the worst of the times. We believe that the market is missing opportunity and mispricing this durable company.