Raytheon CEO: Inflation is a challenge, but labor shortages are a bigger problem

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Raytheon Technologies Corp. Chief Executive Gregory Hayes said Tuesday that while inflation, supply chain constraints and labor availability all acted as a drag on second-quarter results, the availability of skilled labor may be the biggest challenge.

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And Chief Executive Greg Hayes said, “I hate to say this,” but he believes the only thing that will solve the labor availability issue is a slowdown in the economy.

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The aerospace and defense company RTX,
-4.25%
reported before the opening bell net income that rose to $1.30 billion, or 88 cents a share, from $1.03 billion, or 68 cents a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of $1.16 beat the FactSet consensus of $1.12.

“A strong start to the summer travel season drove continued top-line growth and adjusted EPS that exceeded our expectations,” Hayes said.

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Sales grew 2.7% to $16.31 billion, but missed the FactSet consensus of $16.66 billion. The company’s Pratt & Whitney business beat sales expectations, while its Collins Aerospace, intelligence and space and missiles and defense businesses missed.

“Looking ahead, while we expect the global supply chain environment, labor availability and inflation will remain challenging near term, we are actively engaged with our customers and suppliers to meet demand and remain cost competitive,” Hayes said.

Raytheon’s stock dropped 4.3% in afternoon trading. It has shed 8.7% over the past three months, while both the SPDR Industrial Select Sector exchange-traded fund XLI,
-0.49%
and the S&P 500 index SPX,
-1.23%
have declined 6.2%.

Hayes said in the post-earnings conference call with analysts that the company is “aggressively managing” supply chain issues, as its employees have been embedded in about 330 suppliers to help improve performance.

“And we’re also qualifying second, and in some cases, third sources for critical parts as necessary,” Hayes said, according to a FactSet transcript.

For inflation, he said the company has long-term agreements in place for its commercial business that cover about 80% of spending, which provides an inflation “buffer,” at least in the short term.

“And lastly, and perhaps…most importantly, the availability of skilled labor is a real challenge across multiple industries right now,” Hayes said, saying the shortages are seen by both suppliers and within Raytheon.

Hayes tried to explain the how labor availability has become such an issue. He said it started from the COVID-19-related economic downturn from a couple of years ago, in which a lot of people were laid off.

“Typically, we get about 75% to 80% of those folks come back off layoff,” Hayes said, as the economy recovers. “In this case, what we’re seeing in our supply chain is only about 25% of the people are coming back. They’ve found other jobs, similar jobs.”

In addition, he said it takes time to hire and train new employees. “It doesn’t just happen overnight,” Hayes said, especially in certain business segments, such as much of the company’s classified work.

As a result, labor challenges have not yet abated, and supply chain constraints should continue.

,[I]nflation is a challenge. But we can measure it. We can work to overcome it,” Hayes said. “Not having enough people in the supply chain, that is proven to be much more difficult.”

Vertical Research Partners analyst Robert Stallard reiterated his buy rating on Raytheon and his $120 stock price target, citing continued strong demand.

,[C]ompared to other industrial companies [Raytheon] is relatively well protected on inflation, and we think its demand outlook in both aerospace and defense remains resilient even in the face of a slowing global economy,” Stallard wrote in a note to clients. “So while these supply chain and labor issues look set to continue in 2022, we think the outlook beyond this year remains attractive.”

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Credit: www.marketwatch.com /

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