Boeing vs. Raytheon: Which Aerospace & Defense Stock is a Better Buy?

Raytheon Technologies Corporation (RTX) and The Boeing Company (BA) are two well-established companies in the aerospace and defense industry. RTX provides advanced systems and services for commercial, military, and government customers worldwide. It operates through four segments — Collins Aerospace Systems; Pratt & Whitney; Raytheon Intelligence & Space; and Raytheon Missiles & Defense. On the other hand, BA designs, manufactures, and sells commercial jetliners, military aircraft, satellites, missile defense systems, human space flight, and launch systems and services worldwide. The company operates through four segments — Commercial Airplanes (BCA); Defense, Space & Security (BDS); Global Services (BGS); and Boeing Capital (BCC).

The increasing hopes on the passage of the National Defense Authorization Act (NDAA) for the fiscal year 2022 for funding $768 billion for military and national security programs and growing threats from China, Russia, and Iran have helped prominent companies operating in the aerospace and defense industry gain government contracts and investor attention lately. Moreover, massive efforts and funding to combat new generation hypervelocity missiles and deliver improved performance and safety are expected to benefit these companies substantially.

Investor optimism in this space is evident in the Fidelity Select Defense & Aerospace Portfolio’s (FSDAX) 8% gain over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 0.7% return. The U.S. aerospace and defense market is expected to grow at 2.4% CAGR to reach $550.78 billion by 2030. So, both RTX and BA should benefit.

While BA lost 6% over the past nine months, RTX has surged 15.3%. RTX is a clear winner with a 12.5% gain versus BA’s negative return in their past year’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On November 19, 2021, the Missile Defense Agency (MDA) selected RTX’s Raytheon Missiles & Defense segment as one of the companies to develop and test its Glide Phase Interceptor (GPI) specifically designed to defeat a new generation of hypersonic missiles. Developed on behalf of the MDA, GPI will be integrated into the U.S. Navy's Aegis Weapon System, a ship- and shore-based defense system, and advance the missile defense system for future threats. RTX is looking forward to a long-term partnership with MDA.

On November 24, 2021, BA announced plans to build six more MH-47G Block II Chinooks for the U.S. Army Special Operations Aviation Command as part of a $246.48 million contract. Equipped with new lighter-weight fuel pods that increase performance and efficiency, these aircraft will be the first to include the new Active Parallel Actuator Subsystem (APAS), a mission system that helps pilots execute difficult maneuvers and deliver more payload faster, farther, and smarter. Expected to deliver by 2023, BA is looking forward to a long-term partnership with the force in the coming years.

Recent Financial Results

For the fiscal third quarter that ended September 30, 2021, RTX’s adjusted net sales increased 8.2% year-over-year to $16.21 billion. The company’s adjusted operating profit came in at $1.95 billion, up 68.7% from the prior-year period. While its adjusted net income increased 121.8% year-over-year to $1.90 billion, its adjusted EPS increased 125% to $1.26. The company had $7.48 billion in cash and cash equivalents as of September 30, 2021.

For the fiscal third quarter that ended September 30, 2021, BA’s total revenues increased 8.1% year-over-year to $15.28 billion. The company’s earnings from operations came in at $329 million, compared to a loss from operations of $401 million in the prior-year period. BA’s net loss came in at $109 million for the quarter, down 75.7% from its year-ago period. Its non-GAAP loss per share decreased 56.8% year-over-year to $0.60. The company had $9.76 billion in cash and cash equivalents as of September 30, 2021.

Past and Expected Financial Performance

RTX’s total assets have increased at a CAGR of 11.4% over the past three years. Analysts expect RTX’s EPS to increase 54.6% year-over-year in the current year and 19.4% next year. Its revenue is expected to grow 13.1% year-over-year in the current year and 8.9% next year. The stock’s EPS is expected to grow at a 23.9% rate per annum over the next five years.

In comparison, BA’s total assets increased at a CAGR of 8.6% over the past three years. BA’s EPS is expected to remain negative in the current year and rise 34.7% next year. The stock’s revenue is expected to grow 12.4% year-over-year in the current year and 33.7% next year. Analysts expect the stock’s EPS to grow 20.2% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E, RTX is currently trading at 19.69x, compared to BA’s negative 111.38x. In terms of forward EV/Sales, RTX’s 2.34x compares with BA’s 2.44x.

Profitability

RTX’s trailing-12-month revenue of $63.76 billion is significantly higher than BA’s $62.80 billion. RTX is also more profitable, with a 17.3% EBITDA margin versus BA’s negative value.

Furthermore, RTX’s ROA and ROTC of 2.5% and 3.8%, respectively, compare with BA’s negative returns.

POWR Ratings

While RTX has an overall B grade, which translates to a Buy rating in our proprietary POWR Ratings system, BA has an overall D grade, equating to Sell rating. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

RTX has a B grade for Stability, which is consistent with its beta of 1. BA’s D grade for Stability is in sync with its higher volatility. BA has a 1.52 beta.

RTX has a B grade for Sentiment, which is consistent with favorable analyst estimates. Analysts expect RTX’s EPS to grow 54.6% year-over-year in the current year to $4.22. However, BA’s C grade for Sentiment is in sync with negative EPS estimates.

Of the 71 stocks in the Air/Defense Services industry, BA is ranked #57, while RTX is ranked #9.

Beyond what we have stated above, our POWR Ratings system has also rated RTX and BA for Growth, Value, Momentum, and Quality. Get all of BA ratings here. Also, click here to see additional POWR Ratings for RTX.

The Winner

Given increasing funding and demand for advanced defense systems amid growing threats primarily from China and Russia, both RTX and BA are well-positioned to benefit. However, higher profitability, lower valuation, and favorable analyst sentiment make RTX a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access all the top-rated stocks in the Air/Defense Services industry.

RTX shares were unchanged in after-hours trading Monday. Year-to-date, RTX has gained 18.80%, versus a 25.48% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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