Raytheon Technologies Corporation (RTX) and Lockheed Martin Corporation. (LMT) are two of the world’s leading aerospace and defense companies. RTX operates through four segments—Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense. LMT operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space.
Because most countries are committed to sustaining their military capabilities, defense spending is likely to remain stable this year. Despite the coronavirus pandemic’s economic impact, as geopolitical tensions continue most countries are expected to spend significantly on strengthening their defenses. As two of the world’s largest defense technology companies, we think LMT and RTX have the potential to capitalize on this trend and generate substantial returns this year and beyond.
RTX has gained 21.7% over the past year, while LMT has returned 4.5% over the same period. In terms of their past month’s performance, LMT is the clear winner with 14% gains versus RTX’s 0.3%. But which of these stocks is a better pick now? Let’s find out.
Latest Movements
This month, the U.S. Air Force selected RTX’s Collins Aerospace to design the new wheel and carbon brake for the B-52H to reduce its maintenance time and cost while increasing the aircrafts’ availability. In addition, the company supplies generators, communication and navigation systems for the B-52. Also, RTX’s Raytheon Intelligence & Space business will continue to maintain and operate the U.S. government's Relocatable Over-the-Horizon Radar (ROTHR) system, under a five-year contract.
On April 7, LMT and the Royal Danish Air Force celebrated the launch of the first F-35A Lightning II in Texas. The debut should strengthen the global partnership and national defense efforts by the United States, Denmark and other F-35 partner nations.
Last month, LMT was selected by the Missile Defense Agency to lead the development of the Next Generation Interceptor, the U.S.’ most advanced missile defense system. This game-changing system should allow the company to stand out in the defense market.
Recent Financial Results
In the fourth quarter ended December 31, 2020, LMT’s net sales increased 7.3% year-over-year to $17.03 billion. Its net earnings rose 19.6% from their year-ago value to $1.79 billion, while its EPS grew 20.6% year-over-year to $6.38. Its Space segment’s net sales increased 14% from the prior-year quarter to $3.24 billion. The company reported cash from operations of $1.8 billion during this period.
RTX’s net sales increased 40.4% year-over-year to $16.42 billion in the fourth quarter ended December 31, 2020. However, the company’s operating profit was $142 million, representing a decrease of 85.1% from its year-ago value. RTX’s net income was $135 million, compared to $1.14 billion in the prior-year quarter. Furthermore, its EPS declined 93.2% year-over-year to $0.09.
Past and Expected Financial Performance
LMT’s revenue has increased at a CAGR of 9.4% over the past three years. In comparison, RTX’s revenue declined at an annualized rate of 1.8% over this period. Also, RTX’s EBIT has decreased at a CAGR of 32.7%, over the past three years, while the CAGR of LMT’s EBIT increased 16.7% over this period.
LMT’ revenue is expected to rise 4.2% in the current year, and 3.8 % next year. A consensus EPS estimate indicates a 7.1% improvement in 2021 and 6.7% in fiscal 2022. In comparison, analysts expect RTX’s revenue to increase 14.4% in fiscal 2021 and 8.6% next year. Also, the company’s EPS is estimated to increase 37.4% in the current year and 37.6% next year.
Profitability
LMT’ trailing-12-month revenue is 1.15 times RTX’s. But RTX is more profitable, with a gross profit margin of 15.9% versus LMT’s 13.3%.
However, LMT’ cash from operations of $8.18 billion compares favorably with RTX’s $4.33 billion.
Valuation
In terms of trailing-12-month Price/Sales, RTX is currently trading at 1.89x,13.9% higher than LMT, which is currently trading at 1.66x. Also, its forward EV/EBITDA of 14.73x is 32.2% higher than LMT’s 11.14x.
So, LMT is the more affordable stock.
POWR Ratings
LMT has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, RTX has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Value Grade, LMT has a B, consistent with its lower-than-industry P/E ratio. But RTX’s Value Grade of C is reflective of its higher-than-industry EV/EBITDA ratio.
RTX has a Sentiment Grade of B, which is consistent with analysts’ optimism over its future earnings and revenues. LMT, in comparison, has a Sentiment grade of C.
Also, both LMT and RTX have C Momentum Grades, consistent with their price returns over the past month.
Of the 67 stocks in the C-rated Air/Defense Services industry, LMT is ranked #9 while RTX is ranked #40.
In addition to the grades we’ve highlighted, our POWR Ratings system has also rated both LMT and RTX for Growth, Stability, and Quality. Get all LMT ratings here. Also, click here to see the additional POWR Ratings for RTX.
The Winner
Both LMT and RTX can be considered good long-term investments based on their market dominance and major contributions to the U.S.’ defense. However, LMT appears to be a better buy based on the factors discussed here. We think LMT’s relatively lower valuation and higher profitability should help the stock perform better in the long run.
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 learn about the top-rated stocks in the Air/Defense Services industry.
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RTX shares were trading at $77.23 per share on Tuesday afternoon, down $1.49 (-1.89%). Year-to-date, RTX has gained 8.66%, versus a 10.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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