Raytheon Had a Weak Q1 Earnings, but That’s Not Its Only Problem

  • Raytheon Technologies (RTX) lowered its 2022 sales estimate due to global sanctions on Russia.
  • The stock’s dividend yield is moderate but the share repurchase program is more important and positive.
  • RTX stock remains pricey and defensive at the same time.
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Raytheon Technologies (NYSE:RTX), is an aerospace and defense company that provides systems and services for commercial, military, and government customers worldwide. It has performed well in 2022 as its shares have gains of nearly 7% year-to-date. Does this outperformance to all major U.S. stock market indices hide an investment opportunity now to buy RTX stock? I see one supportive factor and two main negative factors, that clearly turn the balance to be bearish.

Analysts are bullish on shares of Raytheon having a 1-year target of $115.44. The rationale behind this bearish opinion is as follows.

RTX Raytheon Technologies $93.56

 A Weak Q1 2022 Report and Lower Sales Report Hurt RTX Stock

Raytheon Technologies reported first quarter 2022 financial results with a focus on: “Strong EPS growth and margin expansion driven by Commercial Aerospace.” This is certainly positive.

I am not impressed by this but rather prefer to give weight to two other factors. First, the firm had a miss on both earnings-per-share (EPS) and revenue. EPS in generally accepted accounting principles (GAAP) was 72 cents. This was a miss by 19 cents. Raytheon’s Q1 revenue of $15.72 billion was a miss by -$115.48 million.

Second, Raytheon lowered its sales outlook for 2022 because of global sanctions on Russia. The company expects sales of $67.75 – $68.75 billion, compared to the previous estimate of $68.5 – $69.5 billion. If we analyze the sales growth 0ver the last two consecutive years, it is slowing down. In 2020 and 2021 the revenue growth was  24.82% and 13.57% respectively and in 2022 it could be 8% taking the upper limit of the revised sales estimate.

The Share Repurchase Program Is a Positive Factor

The forward dividend yield of 2.44%  is moderate although a plus for RTX stock, yet one of the most positive factors now is the share repurchase program. In Q1 2022, Raytheon repurchased $743 million of its shares and for the full-year 2022, it confirmed a share repurchase program of at least $2.5 billion of its shares.

The effect of share repurchases is positive on the intrinsic value of the RTX stock and could be a strong signal from the management that it considers the shares now to be undervalued. My opinion is on the other side though, I do not consider shares of Raytheon to be cheap.

Yet, RTX Stock Remains Too Pricey Right Now

Take several underlying metrics and compare the stock with its Industrials sector for valuation purposes. Except for the price-to-book (P/B) for the trailing 12 months (TTM) and forward P/B ratios, all other key ratios for RTX stock trade at a premium to its sector. Take for example the price-to-sales (TTM) ratio of 1.91 which has a 62% difference from the median value of the sector at 1.33.

So RTX stock remains expensive, but it is also a defensive stock as it has a Beta (5Y Monthly) of 0.85. Is this enough of a reason to buy the stock? I think not.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.