After a red-hot start to 2019, aerospace and defense stocks have traded mostly sideways in recent months. However, one analyst said Thursday it’s time to step in and buy two of the top stocks in the space that agreed to a major merger back in June.
The Analyst
Credit Suisse analyst Robert Spingarn initiated coverage of United Technologies Corporation UTX with an Outperform rating and set a $164 price target.
Spigarn also upgraded Raytheon Company RTN from Neutral to Outperform and raised his price target from $188 to $230.
The Thesis
Spingarn said each of the company’s unique business segments provides long-term value for investors. Credit Suisse has initiated 2019/2020/2021 EPS targets of $8.05/$8.84/$9.92.
Spingarn said P&W’s installed base of engines is positioned to grow “substantially” over the next 10 years. Collins Aerospace has also secured significant content in most new commercial aircraft launched in the past 15 years. Finally, Spingarn said Carrier’s bull case is “re energized” after its recent product refresh cycle.
When it comes to Raytheon, Spingarn said the market doesn’t seem to fully appreciate the company’s 43.% ownership stake of the combined company. Spingarn said Raytheon's pristine balance sheet will be a major help to the combined company.
“This is a significant positive in the context of the pending merger with UTX’s aerospace businesses, as it pairs RTN’s clean balance sheet with UTX Aero’s relatively higher leverage (~2.7x net-debt/FY20 EBITDA),” he wrote in a note.
As a result, Spingarn said the combined company should be able to commit the majority of its free cash flow to shareholders rather than using it to pay down debt.
Benzinga’s Take
Raytheon and United shares are both reasonably valued and pay decent dividends, and neither stock has gained much ground since the merger announcement back in June. If the combined company can demonstrate it can achieve attractive synergies following the approved merger, shares of the new company could get a significant valuation boost.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
Related Links
Blowout: Experts Talk Oil Moves On PreMarket Prep After Saudi Attack
Morgan Stanley Initiates Coverage On Government Services Stocks
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
