Quick Value 5.11.20
Market Performance
[Index | % change WoW ]
S&P 500 | 2930 +3.3%
Dow Jones | 24331 +2.3%
Russell 2000 | 1330 +7.9%
Russell Microcap | 492 +8.1%
10-Year | 0.69% +9bps
Gold | 1707 -2%
Oil | 25 +47%
VIX | 28 -22%
Party on Wayne! Party on Garth!
Market Stats
The WSJ had an article over the weekend titled “Why Is the Stock Market Rallying When the Economy Is So Bad?” — I thought it was fitting to share given the head-scratching confusion around markets rallying…
Here are the cliff notes versions of their “Five Reasons”
People betting on a V-shaped recovery (i.e. a quick snap-back to normal)
Largest companies continue to rise — this is definitely true as I’ve shared in past charts
Earnings for 2020 already considered a wash — most investors throwing in the towel on this year and honing in on 2021
Fear of missing out (FOMO)
The Fed — Money supply growth!
If you’ve been out and about over the past few days (as I’m sure you have), then you’ve probably noticed the pickup in traffic and general activity… People are clearly anxious to get back to their lives…
Consensus view is the end of the world is nigh… I’m not sure main street is giving off the same vibe?
Some things to watch for indicating the market rally is too good to be true:
More planned layoffs — not furloughs but real workforce reductions — like these upcoming actions
Fed easing money supply — the most recent data shows another increase to 20% YoY growth
Earnings results for Q2 worse than expected — we’ll have to wait for this one as Q2 results won’t be known until July-August
Until then… happy hunting…
Quick Value
Raytheon Technologies (RTX)
A “merger of equals” between Raytheon and United Technologies was just completed in early April to form the new Raytheon Technologies. Here’s a link to the June 2019 investor presentation covering the merger.
This is now one of the largest Aerospace & Defense companies in the world with a balanced mix of defense revenue and commercial aviation revenue.
There are 4 pieces to the business:
Pratt & Whitney — Aircraft engine manufacturing and services
Collins Aerospace — “specializes in aerostructures, avionics, interiors, mechanical systems, mission systems and power controls that serve customers across the commercial, regional, business aviation and military sectors”
Intelligence & Space — “specializes in developing advanced sensors, training, and cyber and software solutions”
Missiles & Defense — Weapons manufacturing
Shares outstanding are 1.525bn x $58 stock price = $88.5bn market cap. Net debt is $25bn for a $113.5bn enterprise value.
The original rationale of the deal was to combine Raytheon’s mostly defense business with United’s mostly aerospace business to get a “diversified” company that should hold up well under those respective business cycles. Oh, and to save some $1bn+ in cost synergies.
As a result of the deal, the company expected — ~$25bn net debt, $1bn+ cost synergies, $8bn in free cash flow (2021), and $18-20bn in capital returns over 3 years (dividends and buybacks)
With COVID-19 in full swing, they face some headwinds with lower airline travel which could impact the commercial aviation businesses making engines and aircraft parts.
It looks as though 2020 will be a “throwaway year” where the business will generate enough cash to fund its 3.2% dividend but not much beyond that. If they can find their way back to the $13.5bn 2019 EBITDA figure = 8.4x EV/EBITDA. Potentially inexpensive for a quality long term business.
To make matters more interesting, RTX simultaneously completed the merger between Raytheon/United and spun-off the non-A&D business units: Otis and Carrier — elevators and HVACs. Talk about a complete refocus of the business…