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

Rising geopolitical tensions and bipartisan support for a big increase in the fiscal 2022 U.S. defense budget should benefit prominent aerospace and defense players Raytheon (RTX) and General Dynamics (GD). But which of these stocks is a better buy now? Let’s find out.

Waltham, Mass.-based Raytheon Technologies Corporation (RTX) and General Dynamics Corporation (GD) in Falls Church, Va., are two well-established companies in the U.S. 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. GD offers a broad portfolio of products and services in business aviation, combat vehicles, weapons systems, munitions, shipbuilding design and construction, information systems, and technologies.

Rising geopolitical tensions related to the collapse of the government in Afghanistan might work favorably for the aerospace and defense industry. In addition, because Pentagon leaders are requesting additional funding in the fiscal 2022 defense budget, the industry could benefit. The U.S. aerospace and defense market is projected to grow at a 2.4% CAGR to  $550.78 billion by 2030. So, both RTX and GD should benefit.

While RTX has delivered 19.9% returns year-to-date, GD has surged 33.9% in price. In terms of their past month’s performance, GD is a clear winner with 3.9% gains versus RTX’s negative returns. But, which of these stocks is a better pick now? Let’s find out.

Latest Developments

On July 8, 2021, RTX’s Raytheon Intelligence & Space was awarded a $171.60 million contract for Low-Rate Initial Production Lot I, or LRIP I, of the U.S. Navy's Next Generation Jammer Mid-Band (NGJ-MB) advanced electronic attack system. NGJ-MB will increase the survivability and lethality of fourth- and fifth-generation fighters, making naval aviation much more effective. The award advances the program from the development stage into production and deployment.

On February 4, 2021, GD’s General Dynamics Information Technology (GDIT) signed a Microsoft Partner Agreement for Online Services-Government (AOS-G) to provide federal customers access to Microsoft Corporation’s (MSFT) Microsoft 365 and Azure services and offerings. Based on its long-term partnership with MSFT, GDIT is looking forward to supporting modernization and digital transformation efforts across the federal government.

Recent Financial Results

RTX’s adjusted net sales for its fiscal second quarter, ended June 30, 2021, increased 11.7% year-over-year to $15.88 billion. The company’s adjusted operating profit came in at $1.86 billion, up 112.7% from the prior-year period. RTX’s adjusted net income has been reported $1.57 billion for the quarter, representing a 168.4% year-over-year improvement. Its adjusted EPS increased 164.1% year-over-year to $1.03. As of June 30, 2021, the company had $8.05 billion in cash and cash equivalents.

For its fiscal second quarter, ended July 4, 2021, GD’s revenues declined marginally year-over-year to $9.22 billion. The company’s operating earnings came in at $959 million, up 15% from the prior-year period. While its net earnings increased 17.9% year-over-year to $737 million, its EPS increased 19.7% to $2.61. The company had $2.95 billion in cash and equivalents as of July 4, 2021.

Past and Expected Financial Performance

RTX’s revenue and net income have declined at CAGRs of 0.2% and 24.5%, respectively, over the past three years. The company’s EPS has declined at a 39.5% CAGR over the past three years.

Analysts expect RTX’s revenue to increase 10.9% year-over-year in the current quarter, ending September 30, 2021, 2.8% in the current year, and 9.2% next year. Its EPS is expected to grow 87.7% year-over-year in the current quarter, 16.2% in the current year, and 23.8% next year. Analysts expect RTX’s EPS to grow at a 24% rate per annum over the next five years.

In comparison, GD’s revenue and net income have grown  at CAGRs of 5.7% and 3.2%, respectively, over the past three years. The company’s EPS grew at a 5.2% CAGR over the past three years.

GD’s revenue is expected to increase 4.5% year-over-year in the current quarter, ending September 30, 2021, 3.6% in the current year, and 4% next year. Its EPS is expected to increase 3% year-over-year in the current quarter, 4.8% in the current year, and 8.1% next year. The stock’s EPS is expected to grow at a 7.9% rate  per annum over the next five years.

Profitability

RTX’s trailing-12-month revenue is almost 1.6 times what GD generates. However, GD is more profitable, with an 8.5% net income margin versus RTX’s 3.5%.

Also, GD’s 22.5%, 5.4%, and 9% respective ROE, ROA and ROTC values compare favorably with RTX’s 3.3%, 1.8%, and 2.7%.

Valuation

In terms of non-GAAP forward P/E, RTX is currently trading at 21.08x, which is 21.9% higher than GD’s 17.29x.

In terms of forward EV/Sales, RTX’s 2.37x is 36.2% higher than GD’s 1.74x.

POWR Ratings

While RTX has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, GD has an overall B grade, equating to Buy. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Both stocks have been graded C for Momentum, consistent with their mixed price performance over the past month. RTX has delivered marginal price returns over the past month, while GD returned 1.3% during this period.

GD has a B grade for Value, which is consistent with its lower-than-industry valuation ratios. GD’s 1.74x forward EV/Sales is 9.2% lower than the 1.91x industry average. However, RTX’s C grade for Value reflects its relatively higher valuation compared to its peers. The company has a 2.37x forward EV/Sales, which is 24.1% higher than the 1.91x industry average.

Of the 61 stocks in the Air/Defense Services industry, RTX is ranked #18, while GD is ranked #14.

Beyond what we’ve stated above, our POWR Ratings system has also rated GD and RTX for Growth, Sentiment, Quality, and Stability. Get all RTX ratings here. Also, click here to see the additional POWR Ratings for GD.

The Winner

Based on the latest developments, RTX and GD should benefit in the coming months. However, we think its higher profitability and lower valuation make GD a better buy now.

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 the top-rated stocks in the Air/Defense Services industry


RTX shares were unchanged in after-hours trading Thursday. Year-to-date, RTX has gained 20.70%, versus a 20.14% rise in the benchmark S&P 500 index during the same period.



About the Author: Sweta Vijayan

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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