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UTX/RTN Merger Is A Fairly Valued Opportunity For 2020

|About: Raytheon Company (RTN), UTX
Summary

Mid-high projected EBITDA growth rates.

Company has significant tailwinds moving forward.

Merger synergies create shareholder value.

As United Technologies moves forward with its spin-off of Otis and Carrier (its elevator and HVAC businesses) and merger with Raytheon, the complexity involved with the company paired with the lack of a hyper-growth story can make the company look less than appealing in the current market. Meanwhile, UTX and RTN gained 38% and 52% in 2019, respectively, and are currently trading near all time highs, which can be good or bad depending on your philosophy. However, I see the current price attractive at these valuations. 

Under the proposed merger with an implied EV of $167B, the new Raytheon will have a forward EBITDA of $13.7B for 2020, projected to grow to $17.9B by 2023, as reported to the SEC. I am the first to tell you that earnings projections are inherently flawed, and not to put too much weight into them. However, a forward multiple EV/EBITDA multiple of 11.1 comes in lower than competitors in the defense/aviation businesses with multiples generally in the 12-15 range.

With projected analyst strength in the commercial air traffic and high military spending, the core businesses are set to continue their trajectory of growth. While under no circumstances would I ever wish for a war, current escalating tensions in the Middle East between the US and Iran are likely to only further the high defense spending in the US.

Under the unanimously approved merger expected to close in the first half of 2020, UTX will own 57% of the newly formed company and Raytheon shareholders will own 43%. Management expects merger synergies to include improved technology and R&D capabilities, as well as reduced cost of sales resulting in improved margins. In addition, UTX shareholders will have continued exposure to the Otis and Carrier businesses.

Conclusion: UTX is an attractive play for investors looking for growth at a reasonable price, rather than growth at any price. While the business and stock may not be as the high flying growth tech companies which the market currently values, we should continue to see moderate growth over the next 5 years. Investors who either shy away from merger complexities, or who do not wish to gain exposure to the Otis and Carrier businesses, may prefer to consider an investment in Raytheon, or simply wait until after the merger.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.