Up and down

Aerospace giant RTX Corporation (NYSE:RTX) is a US stock I have my eye on today. City analysts expect earnings here to rise 41% in 2023. This leaves the company trading on a price-to-earnings growth (PEG) ratio of just 0.4.

A reminder that any reading below 1 indicates a share is potentially undervalued.

RTX — which last month changed its name from Raytheon Technologies — has been giving investors plenty to chew over lately. It recently upgraded full-year sales expectations following a strong second-quarter result. But its share price has tanked following news that free cash flow will come in $500m lower than forecast, at $4.3bn.

This is due to problems with its Pratt & Whitney plane engines. A powder metal issue means that it may have to inspect as many as 1,200 engines earlier than expected, putting huge pressure on cash flows.

Reward and risk

Plane engines are complex pieces of hardware with many thousands of parts. So dangers like this are a constant threat to profits. Yet the long-term picture remains extremely bright for the company.

Defence budgets — which struck record peaks of $2.24bn in 2022, according to the Stockholm International Peace Research Institute — look set to keep rising as tension over the geopolitical landscape rises.

Commercial demand for its Pratt & Whitney engines should also surge as plane-building activity steps higher. As the chart below shows, consulting firm Oliver Wyman expects the civil aviation fleet to rise 33% over the next decade.

That said, I’m not prepared to buy RTX shares for my portfolio just yet. The company’s net debt is approaching $30bn, a worrying level for me given uncertainty over the extent of those engine problems and the potential impact this could have on cash flows this year and beyond.

I won’t buy the US stock before I see an update on the issues at Pratt & Whitney. But I’ll be keeping an eye on what happens with a view to buying some cheap shares.

A better buy

I’d rather use any cash I have to pick up some shares in Chemring Group (LSE:CHG). Right now it trades on a forward price-to-earnings (P/E) ratio of just 15.2 times. This is well below a defence sector average of 21.6 times.

Like RTX, the business is in a strong position to capitalise on rising weapons spending. It’s the world’s leading provider of countermeasure technology (with a market share above 50%). It also makes sensors, explosives, and is an expert in electronic warfare and cyber security.

In fact business is already booming. The FTSE 250 firm enjoyed £338.2m worth of orders between October and April, up 81% year on year. Consequently its order book sits at its highest level for 10 years, at £749.5m.

The chance of product failure can spell huge trouble for companies like this. But encouragingly, Chemring has an excellent track record of product delivery and performance. I think it could be a great addition to my shares portfolio next month.

The post Should I buy these 2 value stocks in September? appeared first on The Motley Fool UK.

Northrop Grumman Corporation

Northrop Grumman‘s (NYSE:NOC) Space Systems segment develops satellites, launch systems, and launch vehicles. The company has partnerships with NASA and other government agencies, providing a steady stream of revenue.

Like many space stocks, the company is well-positioned to benefit from growing demand for satellites, particularly for national security purposes. The company’s recent acquisition of Orbital ATK, a provider of rocket and missile systems, is also expected to provide significant revenue opportunities.

Unlike many space stocks, the company has a reasonable price-to-earnings (P/E) ratio of 14.9 times. This is considerably below the industry average of 31.6 times. By considering the discounted cash flow of Northrop Grumman, fair value of the stock at $547.34 is 12.4% above the current share price of $479.47.

Profits in the sector are fairly conservative, with Northrop Grumman expecting a decline in profits next year. Debt levels of 67% are also fairly high, but there is potential if solid fundamentals can develop over time.

Lockheed Martin (NYSE:LMT)

Lockheed Martin (NYSE:LMT) operates a Space segment developing satellites, space transportation systems, and various other classified systems and services.

The P/E ratio of the company is 22.4 times. This is slightly below the sector average, but now close to fair value based on a discounted cash flow calculation. One metric that may interest investors is a return on equity (ROE) of 73%. This indicates efficiency in use of investment, considerably higher than the sector average of 10.2%.

As can be the case with speculative areas such as space stocks, there has been a large amount of shareholder dilution in recent years. This means that investors hold increasingly less value. Debt to equity levels are high at 136.4%, indicating that the company heavily relies on debt rather than investment. However, with dividends growing steadily over the last decade, this strategy seems sustainable.

Raytheon Technologies (NYSE:RTX)

Raytheon Technologies (NYSE:RTX) operates an Intelligence & Space segment developing integrated space, communication, and sensor systems to government and commercial customers.

As with the companies mentioned previously, Raytheon Technologies recently acquired a provider of small satellite technology. This acquisition will diversify the product range.

The company has a higher P/E ratio than the previous two mentioned at 29.3 times. However, with a discounted cash flow calculation, the current price of $104.66 may be as much as 19.3% undervalued. The earnings growth forecast of 13.5% is higher than the industry average of 10.6%, but is still well below the overall market at 14.1%. ROE is also notably lower than competitors at 13.3%. The company clearly has steady growth, but is ineffective with use of investment.

Am I buying?

Space stocks will be an exciting area in the future. Commercial travel, exploration, and defence will be opportunities for investors. However, I will be staying clear until I see reduced debt and steady income across a range of sectors.

Hype and potential are always dangerous words for investors. Therefore, I don’t mind waiting for the right time to buy these companies at a better price.

The post Is now the time to be buying space stocks? appeared first on The Motley Fool UK.