Shares of Raytheon Technologies (RTX) jumped 0.8 % during today's afternoon session, bringing their 52 week performance to -1.8%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's poor growth indicators and mixed market sentiment.
Raytheon Technologies Corporation, an aerospace and defense company, provides systems and services for the commercial, military, and government customers worldwide. The large-cap Industrials company is based in Arlington, United States and has 182,000 full time employees.
RTX Has a Higher P/E Ratio Than the Sector Average
Compared to the Industrials sector's average of 20.49, Raytheon Technologies has a trailing twelve month price to earnings (P/E) ratio of 26.3 and an expected P/E ratio of 18.3. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $3.74 or forward earnings per share of $5.38.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Raytheon Technologies's P/E ratio is higher than its sector average of 20.49, we can deduce that the market is overvaluing the company's earnings.
Raytheon Technologies Is Overvalued in Terms of Expected Growth
Raytheon Technologies's PEG ratio is 2.06. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Raytheon Technologies's case, it tells us the company is overvalued.
RTX Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Raytheon Technologies, the P/B value is 1.97 while the average for the Industrials sector is 3.78.
RTX Is Generating Cash
Raytheon Technologies has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of -5.2%, compared to 1.6% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -8.5% and a coefficient of variability of 45.3%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 7,168,000 | -2,775,000 | 4,393,000 | -7.5 |
| 2021-12-31 | 7,071,000 | -2,322,000 | 4,749,000 | 189.75 |
| 2020-12-31 | 3,606,000 | -1,967,000 | 1,639,000 | -73.88 |
| 2019-12-31 | 8,883,000 | -2,607,000 | 6,276,000 | n/a |
Raytheon Technologies's Is a Profitable Business
If you are looking to make RTX a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively Raytheon Technologies is run.
Raytheon Technologies's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 67,074,000 | 53,406,000 | 20.38 | 5.05 |
| 2021-12-31 | 64,388,000 | 51,897,000 | 19.4 | 28.65 |
| 2020-12-31 | 56,587,000 | 48,056,000 | 15.08 | -41.84 |
| 2019-12-31 | 77,046,000 | 57,065,000 | 25.93 | n/a |
Raytheon Technologies's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 67,074,000 | 8,254,000 | 8.07 | 4.81 |
| 2021-12-31 | 64,388,000 | 7,533,000 | 7.7 | 236.24 |
| 2020-12-31 | 56,587,000 | 7,237,000 | 2.29 | -80.33 |
| 2019-12-31 | 77,046,000 | 11,015,000 | 11.64 | n/a |
Raytheon Technologies's cost of revenue is growing at a rate of -1.6% in contrast to -7.0% for operating expenses. Sales revenues, on the other hand, have experienced a -3.4% growth rate. As a result, the average gross margins growth is -5.8 and the average operating margins growth rate is -8.8, with coefficients of variability of 22.1% and 51.9% respectively.
Raytheon Technologies Benefits From Positive Market Signals
The market sentiment regarding Raytheon Technologies is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $112.03 to $91.49. RTX is trading -4.17% away from its target price of $102.46. 0.6% of the company's shares are tied to short positions, and 81.6% of the shares are held by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-03-31 | Vanguard Group, Inc. (The) | 9% | 125,466,611 | $12,319,566,840 |
| 2023-03-31 | State Street Corporation | 9% | 124,712,751 | $12,245,545,325 |
| 2023-03-31 | Blackrock Inc. | 7% | 101,189,161 | $9,935,763,965 |
| 2023-03-31 | Capital Research Global Investors | 5% | 73,661,823 | $7,232,854,580 |
| 2023-03-31 | Capital International Investors | 3% | 46,031,264 | $4,519,809,924 |
| 2023-03-31 | Wellington Management Group, LLP | 3% | 40,981,688 | $4,023,992,044 |
| 2023-03-31 | JP Morgan Chase & Company | 3% | 36,997,825 | $3,632,816,527 |
| 2023-03-31 | Dodge & Cox Inc | 2% | 33,399,832 | $3,279,529,585 |
| 2023-03-31 | Morgan Stanley | 2% | 30,104,142 | $2,955,925,776 |
| 2023-03-31 | Geode Capital Management, LLC | 2% | 26,237,984 | $2,576,307,713 |
