Raytheon Technologies received a buy rating from a UBS analyst, who launched coverage of the aerospace giant saying the company's defense business cash flow "should provide a solid fortress of cash flow" in light of uncertainty caused by the coronavirus pandemic.
Raytheon Technologies, the company created by the merger of Raytheon and United Technologies, began trading last week.
Shares were climbing Thursday 2.6% to $64.22.
Analyst Myles Walton, who set a price target of $81 a share, said in a note to investors that he expects "a sharp drop in commercial aftermarket and OEM (original equipment manufacturer) sales in 2020 with lingering declines in 2021 before a likely robust recovery."
But the analyst added that the company's "defense cash flow should provide a solid fortress of cash flow while the commercial cycles drops and rises again," Walton said.
Along with Raytheon's projected free cash flow of $3.8 billion to $4 billion a year in 2021-2023, Walton said, "We think UTC aero's legacy defense exposure should add another $1-2B in those years implying that the current stock price (@6% FCF yield) is only counting on defense cash flows."
The analyst added that though the defense budget topline is likely flat through 2022, "we see plus-ups likely in the weapons accounts, which is where the Raytheon portfolio is most exposed."
"Within those accounts, we see favorable trends for major equipment programs within Air Force (Research Development Test & Evaluation) (which we use as a proxy for classified spending) as well as the Missile Defense Agency budget," he said.
Walton noted the current coronavirus pandemic "adds a significant amount of uncertainty to near-term estimates and as such, we are electing to base our valuation on our current (free cash flow) estimate of $7.6 billion."
Cowen analyst Cai von Rumohr also saw the defense sector as a relative safe haven from the pandemic.
The analyst believes Raytheon's defense business as undervalued but he would wait for a pullback to add to positions since it has moved up 27% in the past week. Cowen's von Rumohr has an outperform rating and $66 price target on Raytheon Technologies shares.