We believe Boeing stock (NYSE: BA) is a better pick than its sector peer, Raytheon Technologies stock (NYSE: RTX), given its better prospects. Both stocks trade at the same valuation multiple of around 2x trailing revenues. While Raytheon is more profitable and has demonstrated better revenue growth over the recent years, Boeing’s
BA
Looking at stock returns, Boeing has outperformed with its 14% returns this year, vis-à-vis -2% returns for Raytheon and 12% gains for the broader S&P500 index. There is more to the comparison, and in the sections below, we discuss why we believe that BA will offer better returns than RTX in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in this analysis.
1. How Is Revenue Growth Trending For Boeing And Raytheon?
- Raytheon’s revenue growth has been better, with a 14.2% average annual growth rate in the last three years, compared to -3.3% for Boeing.
- The revenue decline for Boeing can primarily be attributed to the impact of the 737 Max grounding in 2019 and the Covid-19 pandemic on the company’s businesses, given that commercial airlines was one of the worst-hit sectors during the coronavirus crisis. Commercial Airplanes was the largest segment for Boeing, accounting for 57% of total sales in 2018, but the contribution dropped to 39% in 2022.
- Boeing, over recent years, has struggled to ramp up its production, impacting its deliveries. Supply chain disruption and labor issues for some suppliers further added to its woes.
- Raytheon has undergone significant restructuring over recent years. United Technologies
UTX
- Raytheon’s commercial airplane business was also hit during the pandemic weighing on its commercial OEM and aftermarket sales.
- If we look at the last twelve-month period revenues, Boeing has fared better with sales growth of 15.5% vs. 5.7% for Raytheon.
- Boeing, of late, has seen a rise in deliveries. It delivered 480 airplanes in 2022, vs. 340 in 2021 and 157 in 2020, reflecting significant growth. This trend is expected to continue going forward, likely increasing sales for Boeing.
- For Raytheon, both Pratt & Whitney and Collins Aerospace Systems segments have driven the company’s sales growth in the recent quarters, a trend expected to continue with a strong aircraft aftermarket demand outlook.
- Our Boeing Revenue Comparison and Raytheon Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, Boeing’s revenue is expected to grow faster than Raytheon’s over the next three years. We forecast Boeing’s sales to be around $91 billion in 2024, reflecting a solid 36% growth from the levels of $67 billion in 2022. Raytheon’s sales are expected to rise in mid-single-digits annually over this period.
2. Raytheon Is More Profitable
- Boeing’s reported operating margin slid from -2.6% in 2019 to -22.0% in 2020 due to the impact of the pandemic and the grounding of 737-MAX. However, it has recovered since then to -5.3% in 2022. In comparison, Raytheon’s margin slid from 12.7% in 2019 to -1.7% in 2020 before rising to 10.9% in 2022.
- Looking at the last twelve-month period, Raytheon’s operating margin of 11.4% fares better than -3.6% for Boeing.
- Our Boeing Operating Income Comparison and Raytheon Operating Income Comparison dashboards have more details.
- Boeing’s free cash flow margin of 9.1% aligns with 8.5% for Raytheon.
- Looking at financial risk, both are comparable. While Boeing’s 42% debt as a percentage of equity is higher than 24% for Raytheon, its 11% cash as a percentage of assets is higher than 4% for the latter, implying that Raytheon has a better debt position, and Boeing has more cash cushion.
3. The Net of It All
- We see that Raytheon has seen better revenue growth over recent years, is more profitable, and has a better debt position. On the other hand, Boeing has seen better revenue growth over the recent quarters and has more cash cushion.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Boeing is the better choice of the two. Also, after a few years of decline, Boeing’s net margins are expected to turn positive next year, resulting in strong earnings growth.
- If we compare the current valuation multiples to the historical averages, both are comparable. Boeing’s stock trades at 1.9x trailing revenues aligning with its last five-year average, and Raytheon’s stock trades at 2.1x trailing revenues vs. the last five-year average of 2.4x.
- Our Boeing Valuation Ratios Comparison and Raytheon Valuation Ratios Comparison have more details.
- Even if we consider the current P/S multiple of 1.9x, Boeing’s much faster expected revenue growth to $91 billion in the next three years will result in higher market capitalization of around $173 billion compared to the $131 billion currently, implying over 30% potential returns. In contrast, Raytheon’s revenue will likely be about $72 billion in the next three years, and assuming it maintains its current P/S multiple of 2.1x, the market capitalization will be around $158 billion, vs. $145 billion currently, implying roughly 10% gains.
- Overall, we believe investors willing to choose between these two stocks will likely be better off buying Boeing for the next three years.
While BA stock may outperform RTX, it is helpful to see how Boeing’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Despite higher inflation and the Fed raising interest rates, Boeing has risen 14% this year. But can it drop from here? See how low can Boeing stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
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