Raytheon Technologies Corp. (RTX, Financial) came into existence three years ago, the result of a merger between two venerable aerospace companies, Raytheon Co. and United Technologies Corp. Ever since the merger, the company has been trying to optimize the many businesses and divisions it inherited.
Raytheon announced the latest and final phase of its internal reorganization efforts earlier this year. The process has demanded a not insignificant portion of management’s time, energy and attention. Their efforts are now approaching fruition.
Streamlining for efficiency
On Jan. 24, Raytheon announced its earnings for the fourth quarter of 2022. Included in the earnings release was the announcement that the company would be undertaking a significant internal realignment. Specifically, it would see its four existing business units reduced to three—Collins, Ratt & Whitney and Raytheon. These three new divisions are designed to better reflect the parent company’s strategic priorities, streamlining operations and rationalizing business units. Among the major moves is the centralization of intelligence and space units that had been divided between two segments, Raytheon Intelligence & Space and Collins Aerospace. These business units will now fall under the aegis of the new Raytheon segment, which also incorporates the company’s erstwhile Missiles & Defense division.
Responsibility for Raytheon’s internal realignment has largely fallen on the shoulders of Chief Operating Officer Christoper Calio. In the company’s January earnings release announcing the strategic reshuffle, Calio highlighted the advantages of the new structure:
"In 2023 we will further align our market-leading franchises with customer needs to drive operational agility and excellence. By more fully leveraging our scale, we will deliver enhanced customer solutions and unlock cost savings opportunities with improved resource allocation and a streamlined footprint."
The advantages of Raytheon’s new internal organization have become increasingly apparent to observers and analysts alike. Aerospace analyst Dhierin Bechai, for example, pointed to improved efficiency as a major positive outcome of the change in an investor update published June 23:
“One item that should significantly drive the results is improved efficiency…achieved by realigning the business…This combination of several segments should provide a simplified company structure where businesses within the segment are placed where they make most sense from an efficiency perspective as well as for customers.”
By bringing together disparate business units that have operated separately within various legacy divisions, Raytheon can streamline operations to drive efficiency enhancements.
Rebranding for the future
Even as it has moved to rationalize its internal operations, the company has also taken steps to rebrand itself in the public eye. During its Investor Day event on June 19, the company announced it was rebranding itself as RTX Corp., which is also its current stock ticker. Speaking at the time of the announcement, CEO Greg Hayes called the rebrand “a nod to the past and a nod to the future,” noting that RTX melds the former ticker of United Technologies, UTX, with that of the former Raytheon, RTN.
Raytheon, or RTX as it now prefers to be called, took pains to emphasize that the rebrand was more than cosmetic. This point was hammered home in a post on the company’s website on June 19:
“This is more than a new brand. It is a signal of the next step in our company’s transformation. Now, three market-leading businesses – Collins Aerospace, Pratt & Whitney and Raytheon – are working as one to answer the biggest questions and solve the hardest problems in aerospace and defense.”
In other words, the name change serves to underline the company’s new identity and operational makeup following its internal realignment into three distinct business segments. While investors are likely to be more interested in the financial implications of the change, rebranding is a public show of confidence in the new and improved company.
Setting the stage for earnings growth
RTX has largely completed its internal reorganization as of the end of the second quarter, so the second half of the year will be the first test of the company in its new — and hopefully improved — form. During its investor presentation on June 19, the company reaffirmed its expectations of significant financial improvements from the changes, which will accrue to the bottom line in the coming years. The company reaffirmed its expectation of achieving $9 billion in free cash flow in 2025 and projected that it would deliver capital returns to shareholders of between $33 billion and $35 billion through 2025. This growth forecast was supported by expectations of adjusted sales growth of 6% to 7%, combined with strong margin expansion over the next couple years.
On July 25, RTX released its earnings for the second quarter. The company reported $18.3 billion in revenue and earnings per share of $1.29, up 12% and 11% respectively. However, its reported free cash flow of $193 million fell short of initial expectations. This was due to an unexpected issue within the company’s Pratt & Whitney division, which CEO Gregory Hayes addressed directly in the earnings release:
“Based on the strong performance year-to-date and strong endmarkets, we are raising our full year sales outlook and tightening our adjusted EPS outlook. However, we are lowering our free cash flow outlook to reflect the impact of an issue that has recently come to light, which will require Pratt & Whitney to remove certain engines from service for inspection earlier than expected. The continued safe operation of our fleet will always remain our number one priority.”
This event is expected to impact full-year cash flow. Consequently, the company revised its projected free cash flow for 2023 from $4.8 billion to $4.3 billion. While this was a setback, the overall picture did not change meaningfully. Even so, the stock fell in response to the news. As of the close on July 27, shares were down more than 12% since announcing second-quarter earnings.
My take
In my assessment, RTX looks very solid overall. It also looks undervalued based on management’s growth projections. Achieving its 2025 cash flow target, for example, would translate to free cash flow of approximately $6.16 per share. That would seem to have made RTX something of a bargain heading into earnings on July 25. In the wake of its post-earnings slump, it looks even more undervalued.
While it remains to be seen whether RTX can deliver on its lofty earnings expectations, there is reason for optimism. The company has successfully completed a necessary internal realignment that should improve its operating efficiency. At the same time, tailwinds should support several of its key business units for some time to come.
