RTX Corporation Is Finally Fairly Valued – Still A Compelling Buy

Max Zolotukhin/iStock via Getty Images
We previously covered RTX Corporation (NYSE:RTX) in December 2023, discussing the immense support supporting its recovery after the dramatic correction in October 2023.
As the geopolitical landscape turned uncertain and passenger travel returns, increased defense and commercial spending contributed to much of its growing top/ bottom lines and expanding backlog, resulting in our reiterated Buy rating.
In this article, we shall discuss why we are maintaining our Buy rating for RTX, with the impressive rally only bringing the stock back to its fair value. The growth in its backlog also lends credence to the management’s optimistic FY2024 guidance, sustaining its profitable growth trend ahead.
For so long that the company is able to deliver its 2025 financial targets, we believe that it remains well capitalized to pay down its shareholder obligations, despite the increased debt leverage.
The RTX Investment Thesis Remains Compelling Here, Thanks To The Strong Focus On Shareholder Returns
For now, RTX has reported top/ bottom line beats in the FQ4’23 earnings call, with adj revenues of $19.9B (+4.7% QoQ/ +10.1% YoY) and adj EPS of $1.29 (+3.2% QoQ/ +1.5% YoY), and FY2023 adj numbers of $74.3B (+10.7% YoY) and $5.06 (+5.8% YoY), respectively.
Despite so, readers must note that the company has not been immune to the inflationary effect on the COGS and manufacturing processes, as observed in the impacted gross margins of 20.1% (+0.4 points YoY) and operating margins of 8.9% (+0.7 points YoY) in FY2023.
This is compared to the FY2019 margins of 24.1% and +12.6%, respectively,
These headwinds have also contributed to RTX’s moderately deteriorating balance sheet, with a growing long-term debt of $42.26B (+29.6% QoQ/ +38.1% YoY) and increased debt-to-EBITDA-ratio of 3.14x.
Its leverage is notably higher than the 2.66x reported in FY2022, though still improved than 4.45x in FY2019.
This is on top of RTX’s yet-to-be full resolved engine metal issue, which is estimated to be worth $7B to fix, naturally impacting its profitability by $3.5B over the next few years.
Perhaps this is also why the management has moderately lowered their 2025 financial targets at the midpoint, with annual sales growth of +5.75% instead of +6.5%, and adjusted segment operating profit growth at 525 basis points instead of 600 basis points.
However, we maintain our conviction that these are temporal headwinds, since RTX continues to report growing backlog of $196B (+3.1% QoQ/ +12% YoY) by the end of December 2023.
This comprises commercial aerospace contracts at $118B (+2.6% QoQ/ +11.3% YoY) and defense contracts at $78B (+4% QoQ/ +13% YoY). A robust demand for its products is evident from these numbers indeed, which demonstrates the company’s sticky consumer base.
In addition, readers must note that approximately $51.3B (+14% YoY) of its backlog related to commercial aerospace maintenance contracts at Pratt & Whitney are expected to be realized over the next 20 years (+5 years QoQ/ YoY).
If anything, RTX has already committed to multiple cost reduction initiatives, through the automation of its production lines to boost long-term capacity and streamlined business units to reduce overhead/ operational costs.
The management also aimed to fully offset the estimated $1.7B inflationary costs stemming from higher labor and material costs through raised pricings, with 2024 likely to bring forth improved profit margins.
The Consensus Forward Estimates
Tikr Terminal
As a result of the excellent visibility into RTX’s top/ bottom lines over the next few years, if not decade, we can understand why the consensus have also moderately raised their forward estimates, with the company expected to record an expanded top/ bottom lines at a CAGR of +8.8% and +10.1% through FY2026.
This is compared to the previous estimates of +8.4%/ +9.1% and accelerated compared to the historical growth at a CAGR of +2.7%/ -3.7% between FY2016 and FY2023, respectively.
The raised guidance may also be attributed to RTX’s promising FY2024 guidance, with revenues of $78.5B (+5.6% YoY), adj EPS of $5.325 (+5.2% YoY), and Free Cash Flow of $5.7B at the midpoint (+3.6% YoY).
For so long that the company is able to sustain its profitable growth trend moving forward, we believe that it remains well capitalized to pay down its debt and shareholder obligations ahead.
RTX Valuations
Seeking Alpha
And it is for this reason, we maintain our conviction that RTX remains highly attractive at FWD P/E valuations of 16.81x and FWD Price/ Cash Flow of 13.18x, somewhat discounted compared to its 1Y mean of 17.14x/ 19.55x and 3Y mean of 17.32x/ 18.80x.
Even when compared to its Aerospace And Defense peers, such as Lockheed Martin (NYSE:LMT) at 16.56x/ 13.18x, and the sector median of 18.90x/ 14.23x, it is apparent that RTX is not expensive here, thanks to its accelerated top/ bottom line growth ahead.
So, Is RTX Stock A Buy, Sell, Or Hold?
RTX 5Y Stock Price
TradingView
Based on its FY2023 adj EPS of $5.06 and the FWD P/E valuations of 16.81x, it is apparent that RTX is trading near our fair value estimates of $85.00. Based on the consensus FY2026 adj EPS estimates of $6.76, there is still an excellent upside potential of +26.3% to our long-term price target of $113.60 as well.
This is on top of the expanded forward dividend yield of 2.61% (compared to the 4Y average of 2.51% and sector median of 1.48%) and secure dividend with the Seeking Alpha Quant rating it as B+.
Readers must also note that RTX has been putting its cash flow to great use, attributed to the sustained share repurchases with 114.6M or 7.7% of its float already retired over the LTM, 146.8M or 9.7% since the merger in 2021, further exemplifying its shareholder friendly policies thus far.
Most importantly, RTX remains on track to achieving its shareholder returns of $36.5B through 2025, with $29B already completed as of December 2023.
With the management also likely to announce its next dividend hike in the upcoming quarter, as per the historical trend, we maintain our belief that the stock continues to offer a compelling investment thesis through capital appreciation and dividend payouts.
As a result, we maintain our Buy rating for the RTX stock.