Raytheon Applied sciences‘ (RTX 0.89%) second-quarter earnings weren’t excellent, and the corporate has work to do to satisfy its full-year steering.
However there have been sufficient positives to justify shopping for the inventory for long-term buyers. This is why it stays the decide of the aerospace and protection sector.
Raytheon Applied sciences’ second-quarter earnings
The headline information is that administration maintained its full-year steering:
- Gross sales of $67.75 billion to $68.75 billion
- Adjusted earnings per share (EPS) of $4.60 to $4.80
- Free money circulate (FCF) of $6 billion
Nonetheless, the headlines do not at all times inform the entire story, and it is a story of two sectors for the corporate. In a nutshell, energy in its industrial aerospace-focused companies (Collins Aerospace and Pratt & Whitney) is offsetting headwinds in its defense-focused enterprise (Raytheon Intelligence & House, or RIS, and Raytheon Missiles & Protection, or RMD). In truth, administration lowered gross sales and earnings steering for RIS and RMD whereas elevating earnings steering for Collins Aerospace and earnings and gross sales steering at Pratt & Whitney.
Industrial aerospace flying excessive
The rise at Collins Aerospace comes all the way down to a extra favorable margin combine, given the energy in its higher-margin industrial aftermarket gross sales (up 25% within the second quarter).
In the meantime, the gross sales and earnings steering enhance at Pratt & Whitney comes down to 2 elements: A strong industrial aftermarket (up 26% within the second quarter), and what CFO Neil Mitchill described on the earnings name as a “higher industrial” authentic tools combine. CEO Greg Hayes mentioned Pratt & Whitney was operating behind on geared turbofan (GTF) engines (used on the Airbus A320neo household and different plane). The GTF might be nonetheless bought with detrimental margins, so the section’s margin is more likely to obtain a lift as a consequence of lower-than-expected GTF deliveries.
The outlook for industrial aerospace stays extremely constructive, barring a pointy recession. Main airways report favorable circumstances, and may cross on prices to clients as a consequence of surging demand.
Raytheon’s strengthening industrial aerospace market is a motive to purchase the inventory, however buyers and analysts can be involved, not less than within the close to time period, in regards to the outlook for RIS and RMD.
Each the defense-focused companies have been inordinately hit by provide chain pressures and an absence of availability of supplies akin to titanium structural castings. Hayes mentioned the problems on the earnings name, stating that Raytheon’s industrial aerospace companies had 80% of suppliers on long-term agreements (LTAs), which suggests the suppliers ought to maintain buffer inventory in place. Nonetheless, solely 10% of RIS and RMD suppliers are on LTAs, so that they’re extra uncovered to near-term provide chain points.
Hayes went on to say that the protection companies usually purpose to offer 90% to 95% of “kits to the store ground to assemble.” Nonetheless, within the second quarter, “we noticed package fill charges round 50%.” He then described Raytheon’s purpose of attending to 80% by the tip of the yr as “an enormous get.”
At this level, buyers would possibly ask how Raytheon will meet its full-year steering for RIS gross sales to solely decline “mid-single to low single digits” and RMD gross sales to extend barely. For reference, RIS gross sales declined 5.6% within the first half, and RMD gross sales fell 8.9%. So the RMD steering, specifically, seems to be like an enormous ask.
Why Raytheon Applied sciences continues to be a purchase
Despite the fact that the corporate faces the problem of assembly its full-year protection steering, the industrial aerospace enterprise is monitoring forward of authentic plans. Furthermore, it is essential to not get caught up in a few buying and selling quarters. Raytheon might properly miss expectations on protection over the following six months, however the total protection spending setting is enhancing.
Meaning any misplaced 2022 income would doubtless be pushed out. For instance, the battle in Ukraine has strengthened many international locations’ protection spending commitments, and Hayes famous that protection committees are recommending spending will increase on Raytheon protection merchandise. In the meantime, Raytheon’s protection backlog now stands at $65 billion, up $2 billion from the beginning of the yr.
Raytheon is a pretty inventory for aerospace and protection buyers who can tolerate some near-term threat round its earnings in 2022.