Cloudy market outlook makes forecasting a challenge for Raytheon Technologies

The macro-economic outlook continues to be so cloudy with COVID-19 and the commercial travel slump caused by the pandemic that Raytheon Technologies is still not ready to give a corporate-wide financial outlook.

Consider that their current expectation is for commercial air traffic to not get back to pre-coronavirus levels until 2023, RTC CEO Greg Hayes said during the company’s second quarter earnings call Tuesday.

Also look at how second quarter revenue totaled $14.1 billion, up nearly 24 percent over the prior year period. RTC did post a loss of $3.8 billion versus a $1.9 billion profit in the same quarter last year. Just about all of that loss is due to the commercial aerospace headwinds.

Now what of the defense side of the house that is theoretically more insulated from economic headwinds? Especially since the thesis of the merger to create Raytheon Technologies was to have a roughly even balance of government and commercial work, which theoretically hedges against down cycles in either market?

“We know defense spending is not going up in the near term given the deficits that are out there,” Hayes said. “We don’t expect we’re going to see much growth in the defense budget at all.”

Hayes’ outlook is not specifically a forecast that defense budgets will go down significantly. In fact he later went on to say they are “not forecasting doom and gloom scenarios for defense in the next few years.”

But that outlook certainly is a strong suggestion to expect some sort of lid on military spending. Consider that legislation for economic relief and pandemic response such as the CARES Act and currently in-the-works HEALS Act all run a price tag into the trillions.

That cost has led some other government market CEOs to caution investors that pressure on federal spending is very much possible given the deficits will keep climbing if current trends hold. There is also a November election and what the outcomes from the presidential and congressional races could portend.

One aspect of operating in the defense market though is a backlog that gives multiple years of visibility even if the budgets change. RTC reported a defense backlog of $73.1 billion as of the second quarter’s end and a combined 1.2 book-to-bill ratio for its two business that operate almost solely in that market.

Hayes touted RTC’s presence in “those areas where we have real strength: the classified, the cyber and in the space businesses” with “lots of opportunity there.”

Also count Hayes as one of those who does not believe the environment changes all that much if control of the White House and/or Congress changes.

“We still think a strong national defense is a bipartisan issue,” Hayes added.