hi I'm Jimmy in this video we're looking at Raytheon technologies ticker symbol
RTX so we're gonna look quickly at the basics of Raytheon's business and then
we're gonna dive into what their business looks like since they merged
Raytheon and United Technologies to form Raytheon technologies and then we'll try
to come up with a fair value for Raytheon Technologies stock okay so
let's start with the recent merger between Raytheon and United Technologies
so independently both Raytheon and United Technologies had rather similar
businesses United Technologies broke their business into four main segments
they had Collins aerospace which is an aerospace and defense company then they
had Pratt & Whitney which manufactures and services aircraft engines and
auxiliary power units next they had carrier worldwide and then they do
Heating and Air Conditioning and then finally they had Otis which was an
elevator and escalator company now he may know that during this merger both
Otis and carrier gods spun off into their own public companies Otis trades
under the ticker ot is and carrier trades under the ticker CA RR and they
both look somewhat interesting at first glance although I haven't done a deeper
dive on either company just yet okay then with both their pratt & whitney and
then their collins aerospace business they're staying in the new merge two
Raytheon technologies okay simple enough now let's jump over to Raytheon's
business so Raytheon before the merger well they also had four different
segments they had missile systems integrated defense systems they had
space and airborne and then finally they had intelligence information and
services their missile systems was the largest of the four segments but not by
much this was a fairly well rounded company before the merger okay now going
forward as part of the new Raytheon technologies they've merged missile
systems and integrated defense systems to form missiles and defense then the
other two segments also merged they're forming a new segment that they're
calling intelligence in space so this is what we end up from the old Raytheon
business and then we add back both Pratt & Whitney and Collins aerospace well
this is what the four new segments are most likely to look like for the new
raytheon's technologies business ok now this
brings us to the issues that the business is running into right now
clearly at first glance we could guess that given the current state of travel
and when we consider businesses like any one of the airline companies or
companies like Boeing or Airbus well clearly you know there's been a lot of
trouble there so we can expect for some of their commercial airline businesses
to struggle in the next let's say at least year or two now at some point I
would expect for that to change but for now we can assume that some of their
business lines specifically Collins and anything that they have tied to the
commercial airline business well that's going to get hurt a decent amount but
they also have a large portion of their businesses tied to defense contracts in
fact from the most recent numbers that I could find it showed that the u.s.
government accounted was their biggest customer and I think it accounted for
about 16% of revenue now their next largest customer was Airbus and and
finally was Boeing so I think it's probably safe to assume that the revenue
from the US government is going to be perfectly fine this is likely to be the
dominant driver of profits our free cash flow while Airbus and Boeing are likely
to drag them down for at least the next year - okay so with those assumptions
now let's jump over to the valuation of Raytheon technology stock now actually
wanted to try two different valuation methods for valuing Raytheon stock
partially because I think it's a bit tricky if we look at our free cash flow
valuation I'm a bit less confident with projecting free cash flow in more than a
year or two so with this valuation that would mean
that 2022 and 2023 numbers I'm a bit less confident about I just took some of
these estimates from analyst analysts reports that I was able to find now if
you're curious how to do this little calculation I actually did a whole video
on how to do this entire thing I have an excel template and all of that
if you curious I'll leave a link in the description below to that video but what
I did is I took our expected free cash flow and discounted that by a required
rate of return of 7.5 percent then we grew it out by a perpetual growth rate
of two and a half percent that gives us our total company value we take that
divide that by the shares outstanding that gives us a fair value of the
company of about 94 dollars per share now Raytheon has a bit of debt so we're
gonna want to adjust this valuation to for net debt net debt is simply their
debt the debt that they have offset by any cash that they have this is what
that adjustment looks like now we take the new net debt adjustment that's a new
company value we divide that by the shares outstanding and now we have a
fair value of about $78 per share okay so 78 bucks per share looks decent
given that their stock is currently trading right around the $60 per share
range but now let's try a different valuation method so here we're going to
use a free cash flow yield to try to come up with the fair value for Raytheon
stock okay so here's what free cash flow yield is or really how to calculate any
yield let's take a popular yield that many of us know which is the dividend
yield so with dividend yield we simply take
the dividend per share let's imagine that our hypothetical company has a $5
dividend each year or we take that we divide it by the current price let's
imagine that this stock is trading at $100 per share well 5 divided by 100
well we know that this has a dividend the other 5% if they had a $50 price
would be 5 divided by 50 a 10 percent dividend yield we could do the same
things with earnings per share let's imagine that the company had the same
company had $10 in earnings per share well same math for plate rule remains if
the stock is trading at 110 divided by hundred and we end up with an earnings
yield of 10% we may notice that this math is very similar to price to
earnings ratio we're just taking the inverse of it so if we take the price
$100 we divide that by 10 dolls and earnings per share well that is the same
as 10x for price to earnings ratio okay but now if we switch back to her
discounted cash flow numbers real quick let's take our 20 21 free cash flow
estimates so we take that 75 42 which is the same as 7 point 5 4 billion and we
divide that by their expected shares outstanding
right now they have shares outstanding of about 1.5 to billion shares but both
Raytheon and the United Technologies bought back shares fairly consistently
before the merger so there's no reason for us to expect for that to not to
continue now not you they're gonna do any buybacks in 2020 given everything
that's happening right now with coronavirus and pretty much everything
but personally I would expect that they would stop
doing again in 2021 so I estimated that they would do some buybacks in 2021 and
I put their shares at 1501 which is 1.5 billion basically so we take our 2021
estimates for free cash flow we divide those by the shares outstanding or our
expected shares outstanding and we end up with an estimated free cash flow per
share of about five dollars and two cents okay now this is where it gets
interesting now we have to make an assumption about what their free cash
flow yield should be or what it will be so what I did is I calculated their free
cash flow yield for both companies going back to 2006 and I went back to 2006
because I wanted to make sure I included the financial crisis I also only went up
to 2018 because I thought it made sense to stop before the merger came into play
then I averaged out both raytheon's and United Technologies free cash flow yield
and I rounded those numbers to be a combined about six and a half percent so
what if we were to assume that there that the free cash flow yield is going
to be six and a half percent in 2021 well that would give us a fair value of
the stock in 2021 I've bought $77 per share now if you're
curious how to do that you take the five dollars in two cents divide that by
point zero six five which represents the six and a half percent free cash flow
yield end up with about seventy seven bucks but that's in 2021 now what we
need to do is we need to discount that by one year to bring it into 2020 so
imma sue I'm assuming that we're using the same required rate of return of
seven half percent that we used in our discounted cash flow calculation that
brings a fair value to about seventy two dollars per share now for curious we
discount that number we take the 77 divided by one plus our discount rate so
77 divided by one point zero seven five that gives us 72 okay so using our free
cash flow yield we've got a fair value for Raytheon stock of about 72 dollars
per share using our DCF we got a fair value of about 78 dollars per share so
let's just ballpark this and say that rough estimate of Raytheon's fair value
would be about $75 per share once again the stock is trading at about $60 per
share so add $60 per share if we think the stock could go to $75 well that's
almost 25 outside and frankly that looks quite
appealing to me now I personally don't own any shares of Raytheon but I might
pick up some soon because this came out much better than I expected
now actually found this analysis to be quite an interesting one because I had
to dig through a lot of different financials to sort it all up don't
forget they spun off Otis and carrier so that had to be accounted for in the free
cash flow and we tried and I tried to account for that as we were making
estimates going forward but luckily they recently reported quarterly earnings so
we had an idea of how they would account for some things going forward now there
are still some questions as to how they're gonna situate things going
forward but that's why I opted to use twenty twenty one free cash flow
estimates in our 2020 I think there's too many questions
since the merger just happened so we use twenty twenty one keep it a bit more
simple and then just discount it back to today now if you'd like to try to apply
the same process that I used in trying to come up with this analysis actually
did a video where I go through I call it eight simple steps to analyze the stock
and that that's the exact process I used for this analysis so if you're curious
there's a link right here and there's like in the description below
and thank you so much for stick with me all the way into the video I hope you
found this interesting thanks i'll see in the next video