Warren Buffett’s famous advice about being fearful when others are greedy and greedy when others are fearful springs to my mind when I consider investing in Raytheon Technologies . While the overall market may well be being greedy right now, there’s a strong case to be made that investors are behaving fearfully when it comes to stocks with significant aerospace exposure. In a nutshell, that’s why Raytheon stock is a buy.
To put it simply, two-thirds of Raytheon’s current revenue is coming from its defense business, and the market is significantly undervaluing its commercial aerospace businesses. As such, on a risk/reward basis, Raytheon stock is worth buying.
To flesh out this argument, let’s start by looking at Wall Street analysts’ consensus estimates for the company’s performance, and then calculate two commonly used valuation metrics. In this case, I’d recommend considering two ratios: enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EV/EBITDA); and then the price to free cash flow (P/FCF) ratio.
Based on the 2020 estimates, Raytheon is not a cheap stock. On the other hand, its valuation needs to be understood in the context of the growth potential of its commercial aviation businesses — largely inherited from its United Technologies acquisition. I’ll go into detail on this below.
