Raytheon Stock’s Down 35%, But Sales up 25%, Why?

The stock price of Raytheon Technologies (NYSE: RTX), best known for its aerospace and defense products, has declined over 25% since the beginning of 2017. But what went wrong for the company to see such a drop in stock price, despite revenue growth of 35% over the same period? As it turns out, the investors have revised their expectations for future earnings growth from the company, given the impact of the Covid-19 crisis on the aviation sector. An 18% decline in the company’s net income margin over the recent years didn’t help either. Our dashboard on Raytheon Technologies Revenues And Stock Price Change Mismatch provides the key numbers behind our thinking, and we explain more below.

What Brought About A Change In Margins & Multiple?

The contraction in Raytheon’s net margins was brought about by a higher cost of products sold, which as a percentage of products revenue, grew from 74% to 79% between 2016 and 2019. The combination of margins dropping from 8.8% to 7.2%, with revenues growing from $57.2 billion to $77.0 billion has meant that earnings per share grew a modest 5% from about $6.18 per share in 2016 to $6.48 a share in 2019.

However, the bigger change came from a meaningful contraction in the company’s P/E multiple, which decreased from around 14x in early 2017 to about 10x currently. The factor impacting Raytheon’s multiple contraction is the company’s exposure to commercial aviation. The Covid-19 crisis has significantly impacted the commercial airlines industry, and this will have repercussions on Raytheon’s commercial OEM and aftermarket sales. Some of the airlines are barely able to survive, let alone expand. Air travel is unlikely to see a V-shaped recovery and this means fewer orders for new aircraft in the near term. Though for Raytheon, its largest business, defense, may have negligible impact from the crisis with its massive backlog, the cuts are expected to be as high as 50% when it comes to the commercial aviation business.

However, Raytheon does appear attractive compared to its own historical multiple, as well as other industrial companies with exposure to aviation, which have much more aggressive multiples. For example, Honeywell’s stock trades at 17x trailing earnings and General Electric’s stock at 11x. Considering this, we think there is a possibility for the P/E multiple for Raytheon to return to levels of around 13x. Our analysis on Raytheon: Is It The Right Time To Buy Raytheon After A 55% Fall In 2020? has the underlying numbers.

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