Image source: Raytheon website. Over the weekend, defense contractor Raytheon and aerospace company United Technologies announced that they plan to merge.
All Rights Reserved. Raytheon has a big defense contracting business.
CW EV to EBITDA (Forward) data by YCharts. We already know that the newly created company, Raytheon Technologies, will be 57% owned by United Technologies (UTC) shareholders and 43% by Raytheon. Government regulators do have to approve the deal — among them, the combined company’s biggest customer, the U.S. Department of Defense. “They’re looking at it, in this acquisition, truly as a long-term view that this combined company will be able to ride the ups and downs of the markets,” said Doug Gates, head of aerospace and defense for KPMG. The Raytheon Co. and United Technologies Corp. are merging in an all-stock deal that the two companies say is a merger of equals. For reference, the new company will generate around 54% of its sales from defense (primarily Raytheon's missile, intelligence, and defense systems and UTC's mission systems) and 46% from commercial aviation (primarily UTC's Pratt & Whitney and Collins Aerospace). Defense companies, such as Lockheed Martin, Northrop Grumman, and General Dynamics tend to trade on 13 times EBITDA and 16 times EBIT, while commercial aviation-focused companies like TransDigm and France's Safran tend to trade on higher multiples. (For reference, EBITDA is earnings before interest, tax, depreciation and amortization.). For example, a forward multiple of 13 times 2020 EBITDA gives an EV of around $195 billion, and stripping out the $26 billion in net debt gives a market cap of $169 billion -- some 20% above the theoretical market cap (calculated above using Raytheon's current market cap) of $141.1 billion. Therefore, the key difference in … Frankly, both Raytheon and United Technologies look like good values, but the lack of exposure to Carrier and Otis probably makes Raytheon the preferred route to get a piece of what might be the most exciting merger to take place in 2020. Therefore, the key difference in deciding whether to buy Raytheon or UTC stock comes down to the fact that if you buy Raytheon stock, you will end up owning 43% of Raytheon Technologies. “It’s largely a diversification play to build an absolute behemoth aerospace and defense contractor,” said Douglas Rothacker, an analyst at Bloomberg Intelligence, to the Los Angeles Times. Edwin "Mac" Crawford is a former CEO of Magellan Health Services and CVS Caremark who earned a reputation for turning companies around financially. A takeover occurs when an acquiring company makes a successful bid to assume control of a target company. Cumulative Growth of a $10,000 Investment in Stock Advisor, Why Raytheon (and United Technologies) Is a Good Value Stock for 2020 @themotleyfool #stocks $RTX $RTN $LMT $CW $GD $NOC $TDG $SAFRY, UTC's aerospace businesses that have been outperforming lately, China to Sanction U.S. Defense Contractors Over Taiwan Sales, Raytheon, Lockheed Clear Key Hurdle in Race to Develop Hypersonic Weapons, I Don't Blame Dow Jones: I'd Trade Out Raytheon Tech for Honeywell Too, Despite the Risk, Raytheon Technologies Is Worth Buying, Copyright, Trademark and Patent Information. As you can see below, Raytheon Technologies is expected to grow EBITDA in the mid to high single digits in the next few years. Frankly, these implied valuations make the stock look attractive. Digging into UTC's filings at the Securities and Exchange Commission (SEC), here's a summation of analysts' forecast in the S-4 form filed in connection with the merger. Merging our portfolios will also deliver cost and revenue synergies that will create long-term value for our customers and shareowners.". "Our two companies have iconic brands that share a long history of innovation, customer focus and proven execution. But the merger is unlikely to face a lot of pushback from federal regulators, said John “Jerry” McGinn, executive director of the Center for Government Contracting at George Mason University. © 2020 Minnesota Public Radio. Based on the data above, target valuations of an EV equivalent to 13 times forward EBITDA and 15 times current EBIT look reasonable. He expressed concern this morning that too much consolidation in the defense industry may raise prices for the U.S. military — and, by extension, taxpayers. Engineer, investment manager and property developer. Let's take a look at what the new company could look like and try to piece together whether it makes sense to buy the stock. The two companies have common customers but don't have much overlap when it comes to their businesses. Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay. Blue collar workers physically making a better world. Follow me on Twitter to receive quick and thorough analysis of your favorite stocks. Now it's time to take a look at what the earnings of the new company could be and then see if the $167.2 billion valuation makes it a good value. Raytheon Company (RTN) and United Technologies Corp. (UTX) have announced they will be merging in an all-stock deal to form a defense and aerospace conglomerate worth about $121 billion with expected 2019 sales of approximately $74 billion. United Technologies is big in commercial aviation.
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