Raytheon Technologies: This Defense Stock Is a Great Hedge to Fight Rushing Inflation
Raytheon Technologies (NYSE:RTX) soared 20% year-to-date and the bullish trend is set to prevail following increasing geopolitical tensions. Russia’s invasion on Ukraine has prompted a renewed emphasis on security in NATO countries and military spending is estimated to balloon in the next years, benefiting RTX stock.
RTX has a strong portfolio of military equipment and technologies. The company builds the Javelin and Stinger missiles known to be used by Ukrainian territorial defense to counter-attack Russia’s invasion. In addition, strong demand for RTX’s military gear will endure as more and more NATO countries pledge to increase defense spending in the following years. More importantly, high added value defense equipment tends to rise faster than inflation, shown by McKinsey & Company. Inflation on defense rose 20 basis points above the CPI index from 2000 to 2021. This indicates the strong pricing power of the industry, which might prove to be a great hedge in this challenging equity market.
With these catalysts, Raytheon’s fundamentals are poised for advances in the next quarter. Increasing military spending and cost rationalization should contribute to this rapid advance. The management pointed this out in RTX’s fourth-quarter 2022 earnings presentation: “We also exceeded our cost synergy target for the year, delivered margin expansion across our businesses, and returned $5.3 billion of capital to shareowners including the repurchase of $2.3 billion of RTX shares, demonstrating strong execution against our strategy and operational initiatives in 2021.” Besides, RTX surpassed earning per share guidance in the past 20 quarters, an incredible track record for a blue-chip company.
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Profit margins are expected to jump by 300 basis points from 6% in 2001 to 9.06%, providing additional tailwinds to the stock. Raytheon’s balance sheet is well managed, with a steady net debt level of $23.6 billion in 2021, corresponding to a leverage ratio of just 2x.
Despite sturdy year-to-date gains on RTX stock, the company has relatively cheap valuation metrics, trading at 2022e EV/EBITDA of 12.9x and at a forward price-to-earnings ratio of 33.6x. Also, RTX offers a moderate expected dividend yield of 2.06% in 2022, which should not leave investors indifferent.
RTX’s constructive stock momentum is unlikely to halt as the war in Ukraine boosts military spending among NATO members. The stock is a buy at this price and investors should consider this military giant to diversify their portfolio and as a hedge against rising inflation.
On the date of publication, Cristian Docan 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.
Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies.
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