Should You Buy RTX Corp Stock At $85?

RTX: RTX Corp logo
RTX
RTX Corp

RTX Corp stock (NYSE: RTX), formerly known as Raytheon Technologies, has seen a 13% fall in a month, underperforming the broader S&P500 index, up 2%. Although the company reported an upbeat Q2, its recall of over 1,000 engines and associated costs has weighed on its stock. In the longer term, RTX stock is up 23% from levels seen in late 2020, faring marginally better than the S&P 500 index, up around 20%.

This 23% growth for RTX stock since late 2020 can primarily be attributed to 1. RTX Corp’s revenue growth of 25% to $71 billion over the last twelve months, compared to $57 billion in 2020, 2. the company’s P/S ratio rising a modest 0.5% to 1.7x trailing revenues, partly offset by 3. a 1.7% rise in its total shares outstanding to 1.5 billion. This has meant that the company’s revenue per share metric has risen 23% to $48.49 now, compared to $39.54 in 2020. Our dashboard on Why RTX Corp Stock Moved has more details.

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RTX Corp has undergone significant restructuring over recent years. United Technologies merged with Raytheon to form Raytheon Technologies in 2020. Furthermore, it spun off its OTIS and Carrier businesses, making Raytheon purely an aerospace and defense-focused company.

Raytheon’s commercial airplane business was hit during the pandemic weighing on its commercial OEM and aftermarket sales. This trend has now reversed, with both Pratt & Whitney and Collins Aerospace Systems segments driving the sales growth for the company in the recent past. This trend is expected to continue, with a multi-year travel demand recovery.

Late last month, the company reported its Q2 results, which were better than the street estimates. Total sales were up 12% to $18.3 billion, led by a 17% rise in Collins Aerospace revenue and 15% growth for Pratt & Whitney sales. Sales were comfortably above the $17.7 billion consensus estimate. RTX Corp’s bottom line of $1.29 on a per share and adjusted basis was also up 11% y-o-y. This compares with the consensus estimate of $1.12.

Not only did the company post upbeat results, it also raised its full-year outlook. It now expects total sales of $73.0 – $74.0 billion, compared to the $72.0 – $73.0 billion prior estimate, and its adjusted EPS to be between $4.95 and $5.05, up from the $4.90 to $5.05 range. However, the company lowered its free cash flow estimate by $500 million owing to a certain Pratt & Whitney engine recall. While the $500 million figure is for 2023, there are concerns that this cost may increase in 2024.

Finally, looking at valuation, we believe RTX stock has little room for growth, despite its recent fall. RTX stock is trading at 17x forward earnings of $5.00 at the mid-point of the provided range, compared to its last three-year average of 18x. Even if we were to look from a P/S multiple perspective, with RTX stock currently trading at 1.7x forward revenue per share of $50.04, compared to the last three-year average of 1.8x, it implies little room for growth. Our RTX Corp Valuation Ratios Comparison dashboard has more details.

Now, there could be a case for a slightly higher multiple compared to the historical average, given that the company is expected to benefit from rising global travel demand. Also, the ongoing geopolitical tensions should bode well for its defense business. That said, the recall of over 1,000 engines will surely weigh on the company’s bottom line expansion in 2023-24. As such, any significant deviation in the valuation multiple from the historical average may not be justified, in our view. Overall, we believe that investors will likely be better off choosing other stocks in defense and aerospace for better gains in the long term. Our take on Here’s Why Boeing Stock Is A Better Pick Over RTX is one such example.

While RTX stock looks like it has little room for growth, it is helpful to see how RTX Corp’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 RTX Return -3% -16% 42%
 S&P 500 Return -2% 17% 101%
 Trefis Multi-Strategy Portfolio -4% 24% 298%

[1] Month-to-date and year-to-date as of 8/7/2023
[2] Cumulative total returns since the end of 2016

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