A behemoth with room to grow

The Raytheon-United Technologies merger in 2020 was the biggest ever in the sector, creating a focused aerospace and defence behemoth from two firms that previously grew both organically and through smaller deals in recent years. Acquisitions included cybersecurity firms Websense and Foreground Security in 2015, Rockwell Collins in 2018, Blue Canyon Technologies, a satellite provider, in 2020 and, in 2021, FlightAware (the world’s largest flighttracking and data platform) and SEAKR Engineering (a space electronics company).

The post-merger Raytheon reported sales of $64.4bn in 2021, up 13.8% from 2020. The company also achieved an extra $760m of synergies from the merger, taking the total to $1bn. Operating profit was $5bn, but adjusted operating profit (ie, excluding acquisition accounting adjustments) was $7.3bn. Earnings per share (EPS) was $2.6, but $4.3 on an adjusted basis. The company’s guidance for 2022 is for EPS of $4.6 to $4.8 and free cash flow of $6bn, up 20%. The 2025 targets are for a compound annual growth rate in sales of 6%-7%, expanding margins and free cash flow of at least $10bn.

Analysts’ average estimates for EPS are $4.79 for 2022, rising to $5.81 for 2023 and $6.71 for 2024. At the recent price of $103, these EPS figures give a forward price/earnings (p/e) ratio of 21.5 for 2022, falling to 17.7 for 2023 and 15.4 for 2024. However, Raytheon’s guidance was set out in January, before Russia’s invasion of Ukraine. Thus earnings could rise more (and valuations be cheaper) if the general upgrade of Western countries’ defences results in further orders.

Raytheon’s current dividend is $2.04 per share, which gives a reasonable yield of 2%. Share buybacks ($2.3bn in 2021) also support the share price. The firstquarter results are due on 26 April.