Raytheon Technologies is a prominent aerospace and defense company that provides advanced systems and services for commercial, military, and government customers worldwide. With a strong focus on innovation and technology, Raytheon's key business segments include Pratt & Whitney, which designs and manufactures aircraft engines, and Collins Aerospace, a leader in avionics, aircraft interiors, and aerospace systems. The company is also a major provider of defence equipment and cybersecurity solutions, delivering products that range from missile systems to radar and electronic warfare technologies.
Investment Overview
Raytheon Technologies (RTX) is a global titan in the aerospace and defence sector, distinguished by a competitive moat that spans advanced technology and extensive market integration. On the commercial front, Pratt & Whitney, a leading supplier of aircraft engines, including the V2500 and Geared Turbofan (GTF) engines, which power the A220 and highly popular A320 family, setting benchmarks for fuel efficiency and emissions reductions. Similarly, Collins Aerospace fortifies RTX's market position with cutting-edge flight control and avionic systems, and cabin solutions, broadening the company's reach in commercial aviation. In the defence realm, RTX's leadership is underscored by sophisticated radar systems and precision weaponry that leverage decades of R&D investments. Additionally, RTX's aftermarket services, particularly for Pratt & Whitney and Collins Aerospace components, command higher margins and generate consistent revenue streams, offering significant growth potential as the installed base continues to grow.
Solid near-term earnings prospects due to a robust commercial market; defence could surprise on the upside. We anticipate RTX’s adjusted EPS to grow at a 5-10% CAGR over the next two years, primarily driven by an increase in OE deliveries, robust demand for aftermarket services, and a more favourable revenue mix. The commercial aftermarket remains promising, particularly for V2500 shop visits, buoyed by resilient air travel demand and systemic OEM challenges. Meanwhile, a gradual stabilisation and ramp-up in aircraft production also bode well for the group, with significant potential for growth in B737-MAX components and systems, which RTX is currently producing at a rate of about 30 per month. Rising defence spending globally amid escalating geopolitical tensions, could further bolster an already substantial and growing defence backlog, lifting the potential for positive earnings surprises.
Defence segmental margins could remain a drag, while there are still some lingering risks on the GTF engines. We believe that several legacy programs not aligned with their core expertise, along with fixed-price development programs, could impede margin improvement in RTX’s defence business and potentially also lead to additional unexpected charges. RTX is making good progress in de-risking powder contamination issues pertaining to the GTF engines through its fleet management program, with PW1100G MRO output up 10% q/q in 2Q24, and up 30% y/y in 1H24. However, we continue to be cautious as the supply chain continues to face bottlenecks, especially on structural castings, and teething issues for new engines have historically proven challenging. Moreover, there remains the risk that the GTF problems could be more extensive than initially anticipated, potentially affecting other engines as well.
We assign a HOLD rating to RTX with a target price of USD120. The current risk-to-reward setup appears neutral for Raytheon, as it is trading at valuation multiples two standard deviations above its post-merger trading range on a forward 12-month EPS basis, and is aligned with its mid-cycle average multiple based on FY26 EPS projections. Given RTX’s relatively sluggish earnings growth and potential event risk from greater-than-anticipated issues with the GTF engines, we believe that RTX should trade at a discount relative to other commercially focused aerospace and defence companies.
Risks
Supply chain issues are more extensive than initially anticipated; additional unexpected charges may arise from fixed-price development programs within its defence business; there is a risk of spillover from quality issues in its GTF engines to other engine models.
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