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CHINA – 2022/07/25: In this photo illustration, the American multinational airplane manufacturer … [+]
SOPA Images/LightRocket via Getty Images
We believe that Boeing stock (NYSE: BA) is currently a better pick than Raytheon Technologies stock (NYSE: RTX), given its better prospects. Although BA stock is trading at a comparatively lower valuation of 1.5x trailing revenues vs. 2.0x
for Raytheon, this gap in the valuation of these two companies is justified given Raytheon’s superior revenue growth and profitability, as discussed below.
Looking at stock returns, Raytheon has fared better than BA and the broader indices. RTX stock is up 2% YTD, BA is down 25%, and the S&P500 index has declined 18%. While both companies will likely see top-line expansion over the coming years, Boeing
is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe BA stock will offer better returns than RTX stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Boeing vs. Raytheon Technologies
: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Raytheon’s Revenue Growth Is Better
- Raytheon’s revenue growth of 4.8% over the last twelve months is better than a 1.5% fall in Boeing’s sales.
- Looking at a longer time frame, Boeing’s sales declined at an average rate of 13.7% to $62.3 billion in 2021, compared to $101.1 billion in 2018, while Raytheon saw its sales rise at an average growth rate of 23.1% to $64.4 billion in 2021, compared to $34.7 billion in 2018.
- The revenue decline for Boeing can primarily be attributed to the impact of the 737 Max grounding in 2019 and the Covid-19 pandemic on the company’s businesses, given that commercial airlines was one of the worst-hit sectors during the coronavirus crisis.
- Commercial Airplanes was the largest segment for Boeing, accounting for 57% of total sales in 2018, but the contribution dropped to 31% in 2021. Defense, Space & Security Systems is now the largest segment for the company, accounting for 42% of the total sales.
- Boeing, over the recent past, has struggled to ramp up its production, impacting its deliveries. Supply chain disruption and labor issues for some of its suppliers further added to its woes.
- Raytheon has undergone significant restructuring over recent years. United Technologies
merged with Raytheon to form Raytheon Technologies in 2020. Furthermore, it spun off its OTIS and Carrier businesses, making Raytheon purely an aerospace and defense-focused company.
- Raytheon’s commercial airplane business was also hit during the pandemic weighing on its commercial OEM and aftermarket sales.
- However, there are near-term headwinds for both companies. The current high inflationary environment, rising interest rates, and fears of a slowing economy have weighed on the broader markets. Boeing is focused on increasing its overall production, and this, clubbed with its new orders, including a $13 billion order from Delta, will likely support its revenue growth.
- Our Boeing Revenue and Raytheon Technologies Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Boeing’s revenue is expected to grow faster than Raytheon’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 9.9% for Boeing, compared to just a 1.6% CAGR for Raytheon, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
Annual Growth Forecast – BA vs. RTX
2. Raytheon Is More Profitable
- Boeing’s operating margin of -2.7% over the last twelve months is far worse than 11.7% for Raytheon.
- This compares with -1.6% and 16.2% figures seen in 2019, before the pandemic, respectively.
- Raytheon’s free cash flow margin of 10.5% is also better than the -4.4% for Boeing.
- Our Boeing Operating Income and Raytheon Technologies Operating Income dashboards have more details.
- Looking at financial risk, Boeing’s 62.5% debt as a percentage of equity is much higher than 24.2% for Raytheon, while its 8.5% cash as a percentage of assets is higher than 3.0% for the latter, implying that Raytheon has a better debt position, but Boeing has more cash cushion.
3. The Net of It All
- We see that Raytheon has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Boeing has more cash cushion and is available at a relatively lower valuation.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Boeing is currently the better choice of the two.
- The table below summarizes our revenue and return expectation for both companies over the next three years and points to an expected return of 48% for Boeing over this period vs. a 4% expected return for Raytheon stock, implying that investors are better off buying BA over RTX, based on Trefis Machine Learning analysis – Boeing vs. Raytheon Technologies – which also provides more details on how we arrive at these numbers.
Stock Return Forecast – BA vs. RTX
While BA stock looks like it can offer better returns over RTX stock, it is helpful to see how Boeing’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Vicor vs. Williams Sonoma.
With inflation rising and the Fed raising interest rates, among other factors, Boeing stock has fallen 25% this year. Can it drop more? See how low Boeing stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.
BA & RTX Returns Compared With Trefis Multi-Strategy Portfolio
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