Raytheon (RTX) has an enviable problem. The giant aerospace company and defense contractor has an order backlog of $180 billion.
To explain, Raytheon had $180 billion in unfilled orders in the first quarter of 2023, Breaking Defense reports. Raytheon has a backlog because of supply chain problems. In particular, Raytheon has had trouble importing components and raw materials from China.
The backlog occurs at a bad time because the US Defense Department is ordering more weapons for the Ukraine War. Additionally, increased demand for airliners is putting a strain on Raytheon’s Pratt & Whitney’s subsidiary. Pratt & Whitney builds jet engines for airliners.
Around 100 airliners are sitting on the ground awaiting Pratt & Whitney engines, Raytheon CEO Greg Hayes admits. Raytheon, now RTX, is taking steps to expand supply chains beyond China. For example, RTX will open a factory to make turbine blades for jets in North Carolina.
Raytheon CEO admits US cannot decouple from China
Hayes admits the United States cannot decouple from the Republic of China. “We can de-risk but not decouple,” Hayes told the Financial Times.
Hayes admits RTX (RTX) has “several thousand suppliers in China and decoupling is impossible.” Hence, Hayes admits what most American leaders know, but refuse to admit; the United States is dependent on Chinese manufacturing.
Dramaticaly, Hayes admits it could be impossible for Raytheon to build weapons without Chinese suppliers. That could make it difficult for companies such as RTX to supply a US war effort against China. Thus, the US could lose the war because it lacks a supply chain.
“If we had to pull out of China, it would take us many many years to re-establish that capability either domestically or in other friendly countries,” Hayes speculates.
Companies like RTX are stuck because China is the world’s manufacturing superpower. For example, the People’s Republic had 28.4% of the world’s manufacturing output in 2023, WorldPopulationReview estimates. In contrast, the United States had 16.6%.*
Raytheon in China
Hence, most of the production of many items is in China. That forces companies like Raytheon to go to China even for simple items such as spare parts.
Interestingly, Raytheon is in China. Its Pratt & Whitney and Collins Aerospace subsidiaries have around 2,000 direct employees in China. Those companies sell components and services to China’s growing aerospace industry.
Officially, Raytheon cannot sell to China’s Defense ministry. However, cynics will note they can easily repurpose Pratt & Whitney’s aircraft engines for military use.
Bizarrely, the Chinese government has placed sanctions on Raytheon and Hayes for selling weapons to Taiwan’s military, The Financial Times reports Hence, Raytheon is doing business in a country where the government is sanctioning it.
Therefore, RTX has a serious exposure to Chinese risk. Hence, any tensions between the US and Chinese governments or economic problems in China could harm Raytheon.
How Much Money is RTX making?
Raytheon Technologies (RTX), now RTX, is making money. It reported a $3.569 billion quarterly gross profit and a $1.642 billion quarterly operating income on 31 March 2023.
RTX is growing. Its revenues grew by 9.53% in the quarter ending on 31 March 2023. Overall, Raytheon’s quarterly revenues grew from $15.716 billion on 31 March 2022 to $17.214 billion on 31 March 2023. In contrast, the quarterly operating income grew from $3.569 billion on 31 March 2022 and the quarterly gross profit grew from $3.146 billion on 31 March 2022.
RTX can generate cash. It reported a $4.628 billion quarterly operating cash flow on 31 December 2022. However, the quarterly operating cash flow fell to -$863 billion on 31 March 2023. In contrast, the quarterly ending cash flow rose from $839 million in 31 December 2022 to $5.893 billion on 31 March 2023. The quarterly ending cash flow rose from $6.04 billion on 31 March 2022.
Unfortunately, Raytheon is borrowing money. It reported a quarterly financing cash flow of $1.096 billion on 31 March 2023. The quarterly financing cash flow rose from -$2.849 billion on 31 December 2022 and -$1.745 billion on 31 March 2022.
I think RTX borrowed money because it needs to increase US manufacturing to meet contracts. Notably, Raytheon’s total debt grew from $31.914 billion on 31 March 2022 to $34.486 billion on 31 March 2023.
Is RTX a cash-rich company?
Raytheon (RTX) is a cash rich company. It had $5.893 billion in cash and short-term investments on 31 March 2023. The cash and short-term investments fell from $6.04 billion on 31 March 2023.
In consider RTX a value investment because Mr. Market paid $96.53 for Raytheon on 27 June 2023. Yet it had total assets of $161.636 billion on 31 March 2023. The total assets grew from $159.366 billion on 31 March 2022.
Raytheon’s share price is stable. Mr. Market paid $95.87 for Raytheon on 28 June 2023. Yet Raytheon could be a risky investment because of its exposure to China.
Attractively, RTX has scheduled seven 59₵ quarterly dividends between 7 September 2023 and 8 September 2025. Overall, Raytheon offers a $2.36 forward dividend and a 2.46% dividend yield. Hence, Raytheon is a cash-rich dividend stock for those who can stomach owning a defense contractor.
Americans need to listen to Hayes because the RTX CEO admits the competition could be over and China has won. To explain, the People’s Republic could have a lead in industrial production, the US could be incapable of overcoming.
That will change political, economic, and strategic calculations. In particular, many Chinese leaders could assume they can defeat the United States if the US military does not use nuclear weapons. That could make war more likely.
China is on the march is that good for Raytheon?
It could also lead to a more aggressive People’s Republic and Chinese military moves around the world. The Chinese People’s Liberation Army (PLA) has an initiative they call Project 141. The goal of Project 141 is to expand the PLA’s logistics support network beyond the People’s Republic.
Chinese diplomats are negotiating for a “joint-training facility” with the Cuban military, The Wall Street Journal claims. This move could stoke tensions because Cuba is just 90 miles off the Florida coast. Notably, the 1962 Cuban Missile Crisis occurred because of the presence of Soviet forces in Cuba.
Efforts such as Project 141 can increase US-China tensions, which is both good and bad for Raytheon (RTX). This is good because the Pentagon will need more weapons to counter Chinese moves. It is bad because Raytheon needs Chinese suppliers for the components of some of those weapons.
Hence, Raytheon could be the perfect stock for the 21st century. It could make more money from defense contractors even as geopolitics threaten its supply lines. Value investors need to examine RTX for its potential and the dangers from international tensions it exposes.
*https://www.ft.com/content/d0b94966-d6fa-4042-a918-37e71eb7282e
*https://worldpopulationreview.com/country-rankings/manufacturing-by-country
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