- Raytheon Technologies (RTX) looks cheap given its present valuation, and from a historical standpoint.
- Given the company’s own guidance, its earnings could grow 12% this year and its free cash flow (FCF) could rise 20%.
- This implies its value could as much as 29.3% higher than today at $130.77 per share.
One of the most interesting things about Raytheon Technologies (NYSE:RTX) is the stability of the defense company’s revenue and earnings. Indeed, that alone will help ensure that RTX stock could climb significantly higher this year.
And that will be good news for shareholders. They have already seen RTX stock rise 17.5% so far year-to-date (YTD). In a market where most stocks are below where they ended last year, this is quite unique.
Moreover, in this regard, it might impress investors that Raytheon is very confident of producing higher earnings this year.
| RTX | Raytheon Technologies | $101.08 |
Raytheon Technologies’ Earnings Guidance
For example, on Jan. 25, Raytheon reported not only that it made adj. earnings per share (EPS) of $4.27, but provided full-year guidance for EPS. It said that it expects EPS for 2022 to be in the range of $4.60 per share to $4.80.
That implies EPS growth of between 7.7% to 12.4% in earnings per share. That is not an analyst’s forecast. It is directly from Raytheon.
Moreover, it is very specific guidance. In fact, very few companies can provide such a specific outlook, including a specific range for earnings per share. There are so many variables that could affect this projection.
It implies that Raytheon has a good deal of confidence in the stability and high probability of its revenue and associated margins. That alone deserves giving RTX stock a very high valuation.
On top of this, even at the high point of that guidance, it shows that RTX stock is not very expensive. For example, at $101.08, the forward price-to-earnings (P/E) is only 21 times.
Given the stability of its earnings and the certainty with which Raytheon is able to project EPS, the stock could easily be worth 20% more.
That would give it a P/E of 25.2 times and set the target price of RTX stock at $118.44 at the midpoint of Raytheon’s guidance. This implies a potential upside of 17.1% for the stock.
Historical Valuation of RTX Stock
It turns out that Morningstar reports that for the past five years, Raytheon has had an average of 29 times earnings. That is 38% higher than the 21 times earnings multiple that Raytheon has going forward.
In addition, the Morningstar report shows that its earnings yield in the past 5 years was 3.66%. This is derived by dividing net income by its market capitalization. We can use this to help value RTX stock. For example, the inverse of the earnings yield, taken by dividend 1 by 3.66%, is a multiple of 27.3 times.
That puts the target price at $126.31 (i.e., 27.3 x $4.70). This implies that the upside for RTX stock is 24.67% over its price as of March 29 at $101.08.
A third way to value Raytheon is to use its own projection of free cash flow (FCF). The company said that its projection for 2022 is $6 billion in FCF. Using a 3% FCF yield implies that the target market cap is $200 billion (i.e., $6 billion/0.3=$200b).
This is 33.3% over today’s market capitalization of $150 billion. This leads to a price per share target of $134.77 per share.
What to Do With RTX Stock
We have three price targets for Raytheon. Using its own guidance the stock at an average P/E of 25 times should be $118.44. Using a historical P/E metric Raytheon could be worth $126.31 per share. Lastly using an FCF yield metric, RTX stock is worth $134.77.
The average of all three of these price targets works out to $126.51. That is 25% over today’s price.
And this seems right as well. After all, the company seems to have very stable earnings, at least in terms of being earnings projections.
As a result, investors can have a good deal of confidence in the potential 25% upside in Raytheon stock going forward.
On the date of publication, Mark Hake did not hold (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.
