Over the last few months, the Aerospace industry, which includes commercial airlines has been one of the biggest, unquestioned losers in the stock market. Yes, the biggest portion of the fact that the industry is down more than -37% since February is because commercial travel has dried up to practically nothing because of global shutdowns and shelter-in-place orders. Even before COVID-19 began dominating the world’s attention, though, this is an industry that was already experiencing its share of trouble.
There are two principle commercial airline producers in the world: Boeing and Airbus. Boeing spent practically all of 2019 dealing with the negative impact of fatal crashes of its popular 737 MAX jet that killed all passengers all board. Those crashes were attributed to failures in the planes’ sensor system, resulting in the global grounding of the jet all over the world as the company went back to the drawing board. As of this writing, the 737 MAX has still not been returned to service, and doesn’t appear to be. That single event was already putting a lot of pressure on commercial airlines who had significant portions of their fleet made of Boeing’s best-selling jet. Add COVID-19 to the mix, and it isn’t too hard to see why a lot of investors just see this industry as radioactive right now.
This is where sometimes my contrarian nature sometimes proves useful. I certainly don’t downplay the seriousness of the global pandemic that we still don’t see the end of, even as governments are taking first, hesitant steps to restart regional, national and global economies. I also have no illusions about the reality that even when consumers begin traveling again, it will probably be under dramatically different conditions and rules than were in place just a couple of months ago – or that the concerns related to Boeing are going to be resolved soon. That said, the negative pressure these elements have put on the industry have pushed prices on stocks throughout the Aerospace industry to extreme lows.
Being a contrarian means that even in seriously depressed industries, I’m used to sifting through through a lot of data to dig the occasional gem out of what might otherwise look like a complete wreck to everybody else. In Aerospace, I think there are still bright spots to find opportunity right now. Raytheon Technologies Corp. (RTX) is an example.
In the commercial airline segment, RTX’s biggest customer isn’t Boeing – it’s Airbus, which before COVID-19 became a global issue was drawing a number of Boeing customers to its business. It also is a major player in the government-funded Defense space, which has historically proven to be resilient and even resistance to economic downturns. I believe the upshot is that while the commercial side is likely to remain under pressure for the foreseeable future, it will probably also recover more quickly than other companies whose businesses are closely tied to Boeing. The strength in their Defense business should keep their balance sheet, which is already healthy, strong even if the current economic downturn extends into a longer-than-expected period of time. Along with a value proposition that is among the strongest in the market that I’ve seen in the last month or so, and a dividend yield well above long-term Treasury levels, I think that RTX could be an excellent long-term investment for a patient, value-driven investor. Here are the numbers.
Fundamental and Value Profile
Raytheon Technologies Corp, formerly, United Technologies Corporation is engaged in providing high technology products and services to the building systems and aerospace industries around the world. The Company operates through segments such as Pratt & Whitney and Collins Aerospace Systems. The Pratt & Whitney segment supplies aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney segment provides fleet management services and aftermarket maintenance, repair and overhaul services. The Collins Aerospace Systems segment provides aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations. RTX has a current market cap of $99.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -0.51%, while sales increased 8.35%. In the last quarter, earnings dropped a little over -12% while Revenues were flat, but positive at 0.28%. RTX’s Net Income versus Revenue is healthy; over the last year this number was 7.19%, dropping somewhat to 5.85%. I think most of that decline is attributable to the slowdown in the commercial segment, and that does mean that this number could keep declining in the quarters ahead, which means that it does bear watching carefully.
Free Cash Flow: RTX’s Free Cash Flow is healthy, at a little more than $6.6 billion. That translates to a healthy Free Cash Flow Yield of 12.06%.
Debt to Equity: RTX has a debt/equity ratio of .90, which is a good reflection of the company’s conservative approach to leverage. Their balance sheet shows a little less than $7.4 billion in cash and liquid assets against $39.9 billion in long-term debt. Servicing their debt is no problem, but continued declines in Net Income could put pressure on the company’s liquidity.
Dividend: RTX pays an annual dividend of $2.94 per share, which at its current price translates to a dividend yield of about 4.64%. Even at that attractive level, RTX’s dividend payout is also less than 50% of the stock’s earnings per share over the last twelve months – a conservative figure that actually helps bolster the company’s balance sheet strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $132.80 per share. That means that RTX is significantly undervalued, with a little more than 100% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line defines the stock’s downward trend from the third quarter of 2018 to its low point in March at around $41. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. RTX had been following a modest, intermediate upward trend through the last half of 2019, peaking at about $92, inline with the 50% retracement line before collapsing to its March low under the weight of COVID-19-induced concerns. The stock has picked up bullish momentum from that point, rallying to its current price at around $65, which is more than 50% higher from that low. The stock is current hovering near resistance, at around $67, with near-term support at around $61. If the stock drops below $61, it could fall quickly before finding its next support at around $50; however if it can break above $67, it could drive to anywhere between $75 and $80, where the 38.2% retracement currently rests.
Near-term Keys: RTX’s fundamentals are strong, despite the sizable headwinds in its commercial business. I also really like their value proposition, but don’t ignore the stock’s exposure to broad market-based volatility right now; a resumption of the broad market’s bearish momentum could kill RTX’s current, impressive rally in short order, so you need to be willing accept some volatility right now to take a long-term position. If you prefer to work with short-term strategies, start by looking for a break above $67 as a signal to buy the stock or work with call options, using $75 as a first-hit profit target and $80 if bullish momentum continues. If the stock drops below $61, consider shorting the stock or working with put options, with $50 acting as an attractive profit target on a bearish trade.