Raytheon Earnings: Great Progress; We Expect To Maintain Our $106 Fair Value Estimate

We expect to maintain our $106 fair value estimate for wide-moat Raytheon Technologies RTX in light of healthy progress it reported in the first quarterly results of 2023. Despite some lingering crimps in its specialized supply chain, the firm saw commercial wins in the quarter and provided transparency into its medium-term revenue and profit forecasts. Our perspective hasn’t changed—the company has a very strong portfolio with solid profitability in view, and the shares are not cheap.

Highlights in the quarter included strong new orders among multiple business lines, leaving Raytheon Technologies with a $180 billion order backlog, more than two years’ worth of future revenue. The inclusion in next year’s defense department budget of an upgraded Pratt & Whitney F135 engine (to power F-35 combat jets delivered by Lockheed Martin), versus an alternative design proposed by GE, is also a long-term win for Raytheon. Management reaffirmed its prior expectations for full-year results, reflecting some give and take in the company’s overall revenue and profit profile for the rest of 2023.

Raytheon’s results are emblematic of the overall aerospace and defense business model across a broad defense and commercial portfolio: sales related to early-stage development programs (for the military) and product lines earlier in their (commercial) life cycle do not benefit the bottom line in the here and now, as much as they portend a growing head of steam for future profits. Case in point: Pratt & Whitney doesn’t make money delivering its new GTF engines, which power about half the A320neo-series fleet—rather, it stands to gain from long-term profitability over their 15- to 20-year life as they come in for service and replacement parts, as it does today servicing previous-generation V2500 engines. In the military business a similar dynamic will unfold, albeit over decades, as profitable sales of legacy systems like Patriot and Tomahawk missiles give way to their replacements.