Missile Maniac — Raytheon Technologies Corporation

Photo by Clark Gu from unsplash

Preface

It is not the mighty Thor from Marvel movies; it is not the popular chocolate that was sought after in Taiwan; it is not a slot machine game featuring Thor’s Hammer.

It is a multinational, large-scale high-tech defense company, one of the five titans in the US military-industrial complex. Raytheon Technologies Corporation

Mighty Raytheon

Raytheon Technologies Corporation (NYSE: RTX) is a major American defense contractor headquartered in Massachusetts. As mentioned earlier, approximately 70% of Lockheed Martin’s orders come from the U.S. Department of Defense, but the protagonist of this article, Raytheon, takes it a step further with nearly 90% of its business derived from contracts with the Department of Defense.

It can be described as a true military-industrial company, with its performance closely tied to the Pentagon. The name “Raytheon Technologies Corporation” came about due to the merger of Raytheon Company and United Technologies Corporation in 2020, but it is still commonly referred to as Raytheon for convenience and familiarity.

Many people are unaware that the inventor of the ubiquitous household appliance, the microwave oven, was actually a scientist employed by Raytheon Corporation. His name was Spencer. It all started one day when he was working near a radar device and noticed that his pocket became sticky and gooey. Upon investigation, he discovered that the chocolate bar in his pocket had melted into a gooey mess. While others might not have thought much of it and simply eaten the melted chocolate with toast, Spencer was not an ordinary person. He delved into studying the underlying principles and factors involved. He found that the chocolate had been melted by the microwave emitted by the magnetron in the radar device.

Through continuous testing and improvement, he successfully invented the microwave oven, which revolutionized the way people effortlessly heat and cook food. His invention saved countless overworked employees who relied on reheating refrigerated leftovers. His contribution can truly be regarded as immeasurable.

However, despite being such a company, its main business is not directly related to people’s daily lives. Raytheon’s core business areas include:

1. Defense Systems: Raytheon develops and manufactures a wide range of advanced defense systems, including missiles, radars, sensors, command and control systems, electronic warfare systems, and cyber defense solutions.
2. Integrated Defense Systems: This division focuses on providing integrated solutions for air and missile defense, maritime and naval systems, as well as intelligence, surveillance, and reconnaissance (ISR) capabilities.
3. Intelligence, Information, and Services: Raytheon offers intelligence and information solutions, as well as technical services to support a variety of defense and government missions worldwide.
4. Missile Systems: Raytheon is a leading manufacturer of advanced missile systems, including air-to-air missiles, surface-to-air missiles, anti-ship missiles, and precision-guided munitions.
5. Space and Airborne Systems: This division is involved in developing and delivering advanced sensors, communications systems, and electronic warfare capabilities for both space and airborne platforms.
6. Forcepoint: Raytheon’s subsidiary, Forcepoint, specializes in providing cybersecurity solutions for both government and commercial customers.

As evident from the above, Raytheon’s main responsibilities in the defense sector include aircraft engines (including the renowned engine company Pratt & Whitney, which is currently a part of Raytheon), avionics equipment, missiles, air defense systems, radar satellites, and unmanned aerial vehicles. Among these, it is particularly known for its dominance in the international market for missiles.

Missile Maniac

Photo from Wikipedia

Raytheon’s missile products, even recognized by the general public who may not be military experts or enthusiasts, include the following well-known products:

1. Tomahawk Cruise Missile
2. Standard Missile (SM) Family
3. Sidewinder Air-to-Air Missile
4. AMRAAM (Advanced Medium-Range Air-to-Air Missile)
5. Excalibur Precision Guided Projectile
6. Javelin Anti-Tank Missile
7. TOW (Tube-launched, Optically tracked, Wire-guided) Missile System
8. Hellfire Air-to-Ground Missile
9. RAM (Rolling Airframe Missile) System
10. Patriot Missile System

These are just a few examples of Raytheon’s renowned missile products.
It should be clear to everyone how obsessed this company is with missiles and how relentless they are in their research and production. Their dedication to missile development is nothing short of fanatical, and the reason they are highly regarded in the international market is due to the impressive combat performance of their product lineup.

Taking the example of the Portable Stinger Missile (referred to as “Stinger”), during the Soviet invasion of Afghanistan, the CIA secretly provided a large number of Stinger missiles to the Taliban fighters and other Afghan guerrilla groups. Considering the mountainous terrain of Afghanistan, the lightweight and portable nature of the Stinger allowed individual soldiers to effectively engage and cause significant casualties to Soviet armed helicopters.

This portable air defense weapon, coupled with its shoot-and-forget capability, enabled Afghan resistance forces to easily down passing Soviet aircraft while taking cover in high-altitude mountainous areas, rendering the invading Soviet forces vulnerable and defenseless.

As of current statistics, over 270 aircraft have fallen victim to the deadly strikes of the Stinger missile. Its impressive and gruesome track record has garnered significant attention and interest from countries worldwide. With a production quantity exceeding 70,000 missiles, this weapon, despite being developed four decades ago, continues to play an active role on today’s battlefields.

In the ongoing Russia-Ukraine conflict, Ukrainian forces, aided by substantial supplies of Stinger missiles from NATO, have successfully neutralized numerous Russian aerial combat assets. It has become a common sight to witness tanks being targeted with javelins and aircraft being bombarded with Stinger missiles, as if adhering to the RPG cult, where the thrill of accumulating kill counts brings unbridled joy to its followers.

Another notable example is the Sidewinder missile. In 1958, tensions escalated between the Republic of China Air Force and the People’s Liberation Army Air Force in the airspace over the Taiwan Strait. In this minor altercation, the ROC Air Force fired a total of six Sidewinder missiles, resulting in one damaged and two destroyed enemy aircraft. Some of the Sidewinder missiles landed on Chinese territory, which was seen as a treasure trove for the Communist Party of China (CPC) at that time, as they were in desperate need of advanced missile technology. When the Soviet Union, their ally, expressed interest in borrowing the missiles for research purposes, the CPC feigned ignorance and later dismantled the guidance heads before handing them over to Soviet experts, much to the frustration of the Soviet side.

In the current year, the Sidewinder missile made headlines again due to news about Chinese espionage balloons. On February 4, 2023, a Chinese espionage balloon drifted into the airspace over South Carolina, United States. The US military responded by deploying F-22 Raptor fighter jets and using Sidewinder missiles to shoot down the balloon. While the political implications outweighed the military significance in this particular incident, it is evident that the Sidewinder missile still holds a certain position in air-to-air combat.

Without going into further detail about the aforementioned incidents, it is important for readers to understand that investing in this company is essentially equivalent to buying missiles. Each missile launched represents a portion of your investment capital.

Investment Advantages and Investment Risks

Now let’s analyze the investment advantages and risks of Raytheon Technologies Corporation:

Investment Advantage 1:

Since the merger in 2020, Raytheon Technologies Corporation has made significant progress in integrating the technologies of Raytheon and United Technologies Corporation. Investing in the defense industry is essentially investing in an alternative technology sector. The future focus will be on the company’s research and development capabilities, which Raytheon has demonstrated to be strong in. With an annual investment of nearly $9 billion in R&D, accounting for 13% of the group’s sales, the company showcases a solid integration capability and a commitment to innovation.

Investment Advantage 2:

As a multinational defense contractor, Raytheon Technologies Corporation doesn’t solely rely on business from the US government. Other allied nations around the world also purchase American-made weapons. In 2023, the US defense budget saw an 8% increase, and in the Far East region, countries like Japan experienced even higher growth rates, reaching 26%. This is primarily due to the presence of unfriendly neighbors such as Russia, North Korea, and mainland China in close proximity. With the escalating global geopolitical risks, companies like Raytheon stand to benefit from the favorable market conditions as a defense contractor.

Investment Advantage 3:

In recent years, Raytheon has significantly reduced its debt-to-capital ratio and its financial leverage ratio is nearly 1500 basis points lower than its peer, Northrop Grumman. This demonstrates commendable operational performance, especially considering the current global economic environment characterized by relatively weak conditions due to the tightening cycle of interest rates led by the Federal Reserve.

Investment Advantage 4:

Over the past three years, Raytheon has achieved a compounded annual growth rate of nearly 6% in dividends. While it may not be on par with other dividend aristocrats in the defense industry like Lockheed Martin or Northrop Grumman, this still presents a long-term investment advantage.

Investment Advantage 5:

Raytheon’s forward price-to-earnings ratio is approximately 18, which can be considered relatively cheap compared to other defense companies. Its stock price is also the most affordable among the top five defense contractors, trading at around $90–100 per share. Investors with lower capital but still seeking to participate in the defense industry’s profitability may consider purchasing Raytheon shares.

After reviewing the investment advantages, the following are potential investment risks that investors need to weigh for themselves.

Investment Risk 1:

In the future, laser weapons will be a key area of military development, and an increasing number of defense contractors have started researching laser equipment. The advancement of laser weapons is bound to impact the use of missiles. Although Raytheon is also a leading developer of laser weapons, and missiles are expected to maintain a significant battlefield presence in the foreseeable future, it is difficult to say that missiles will be entirely unaffected by the rise of laser weapons.

Investment Risk 2:

Raytheon has a substantial backlog of orders, with the outbreak of the Russo-Ukrainian war resulting in a backlog amounting to $175 billion. However, there is a possibility that these backlog orders may not be converted into corresponding revenue in the event of unforeseen variables. On the other hand, barring any major unexpected events, Raytheon’s future revenue visibility remains steady.

Investment Risk 3:

When investing in US defense contractors, it is important to consider their position relative to their counterparts in the aerospace and defense industries. Since its merger with United Technologies Corporation in 2020, Raytheon has been gradually regaining its position, but there is still some distance to cover in order to reach the midpoint of the range. However, considering the company’s future earnings potential, it is believed that Raytheon shouldn’t face significant challenges in returning to its previous stature.

Investment Risk 4:

If a defense contractor like Raytheon falls behind its competitors such as Lockheed Martin, Boeing, and General Dynamics in terms of weapon innovation and research and development, it may face challenges in securing government contracts in the United States. However, considering the US government’s preference for maintaining a diversified defense ecosystem, even if Raytheon cannot outcompete other rivals in certain areas, it can still secure a certain number of defense orders on a regular basis.

Conclusion

As of the time of writing this article, Ukraine’s Patriot missiles successfully intercepted Russia’s hypersonic Kinzhal missile, surprising military experts worldwide and once again shining the spotlight on Raytheon Company in the military media.

Raytheon Company has a diversified business portfolio in the defense sector, which enables it to benefit from the global trend of increased defense spending. Its high level of diversification also positions the company to capitalize on opportunities even if the US dollar remains weak, potentially translating into satisfactory financial results in the short term. The stock price investment threshold for Raytheon is comparatively lower than the other four major defense contractors.

Although its dividend growth may not match that of other dividend aristocrats in the defense industry with over 20 years of consecutive growth, it has been showing a consistent upward trend in recent years. Moreover, with a Payout Ratio of only 57.28%, the company still has significant potential for future dividend increases. Raytheon also has ample resources to invest in innovative research and development of new weapons to stay competitive in the market.

If the focus is on steady stock prices and receiving dividends to counter market volatility, Raytheon Company (NYSE: RTX) would be a worthy consideration.

Perhaps investing in this missile enthusiast is a unique way to show support for Taiwan?