Summary
- Raytheon's valuations are more attractive than the three stocks that replace it on the DJIA.
- Defence contracts growth expected.
- Upside and price target explained.
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The timing of calling Raytheon's (RTX) upside could have worsened if investors did not brush off the Dow Jones shake-up. Effective August 31, the index will drop Raytheon, Exxon Mobil (XOM), and Pfizer (PFE). Three stocks with a significantly higher share price and weighting on the DJIA index will take their place. S&P Dow Jones Indices said that it will add Salesforce (CRM), Amgen (AMGN), and Honeywell (HON).
Taking the defense plays out makes no sense. The stock trades at a forward price-to-earnings of 16.2 times, pays a dividend that yields 3.1%, and has promising growth ahead. While investors should continue accumulating Raytheon shares, they should still compare the company to the new members of the index.
Valuation
Raytheon trades at an EV/EBITDA comparable to Honeywell and Amgen. But its price/sales and Shiller price-to-earnings is lower, at 0.8 times:
| Ticker | Company | EV/EBITDA | Forward P/E | PEG Forward | Shiller PE | Price/Sales |
| CRM | Salesforce.com | 98.4 | 72.9 | 4 | 100+ | 12.8 |
| RTX | Raytheon Technologies | 17.5 | 16.2 | - | 10.8 | 0.8 |
| HON | Honeywell International | 15.1 | 21.5 | 10.1 | 31.6 | 3.5 |
| AMGN | Amgen | 13.6 | 15 | 2.4 | 32.2 | 6.2 |
The ratios above re-affirm Raytheon still trades at a discount. According to Stock Rover Research, the stock has a fair value of above $70 and a margin of safety in the teens:
So, investors are discounting the stock on worries that the United Technologies merger would hurt its performance. Analysts have a price target in the range of $70 - $81. At a recent close of $60.91, investors should get a return of at least 15%.
