Company Reports

RTX's businesses include Collins' aerospace componentry and subassemblies, Pratt & Whitney's engines, and Raytheon's missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries and is unique in its relatively even split between commercial and defense revenue; most other firms in the industry are heavily skewed one way or the other.

RTX announced first-quarter 2024 results that were very close to our expectations, with one exception: revenue at Pratt & Whitney outpaced our forecast because the firm accelerated deliveries of new GTF engines in the quarter. So far, wide-moat RTX seems to have contained the financial fallout from its metallurgy-related recall of GTF engines, though the maintenance plan won't conclude for a few more years. We haven't altered our long-term forecasts, and our fair value estimate has increased to $115 from $112, primarily for the time value of money and the firm's slightly lower share count since the end of 2023.

We are reviewing President Joe Biden's fiscal 2025 defense budget request, released March 11, which is limited by a compromise struck in mid-2023 to avoid government shutdown at only a 1% increase over the 2024 sum.

RTX announced final 2023 results that came in a touch higher than our year-end expectations and slightly reined in its expectations for 2024 and 2025 revenue and margin growth. The firm seems to have contained the financial fallout from its metallurgy-related engine recalls, and we think medium-term cash flow variability from such charges seems unlikely.

Along with third-quarter results, RTX announced a $10 billion accelerated share purchase program based on the stock trading at "a significant discount to intrinsic value." We agree, and commend management for paying attention to valuation in the timing of the purchase. We reaffirm the company's Exemplary Capital Allocation Rating and have restored our fair value estimate to $112 from $111. The final tally of charges for the Geared Turbofan recalls came in slightly lower than we had forecast and medium-term cash flow variability seems less likely.

RTX's businesses include Collins' aerospace componentry and subassemblies, Pratt & Whitney's engines, and Raytheon's missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries and is unique in its relatively even split between commercial and defense revenue; most other firms in the industry are heavily skewed one way or the other.

We see Oct. 9, 2023's sudden price increase in defense stocks as an overblown and simplistic reaction to the outbreak of war in Israel and Gaza. As we have pointed out before, the dots between military combat and the profit of a defense contractor do not connect nearly as directly as they seem to in the investing public's imagination. We will not alter our ratings or valuations of defense contractors in light of this news, and we believe long term development and resupply of missile defense technology are already baked sufficiently into our forecasts.

We have decreased our fair value estimate for wide-moat RTX to $111 per share from $112 to reflect updated guidance from the company about the cost of inspecting and replacing core parts of more than a thousand Pratt & Whitney engines over the next couple of years.

RTX's businesses include Collins' aerospace componentry and subassemblies, Pratt & Whitney's engines, and Raytheon's missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries and is unique in its relatively even split between commercial and defense revenue; most other firms in the industry are heavily skewed one way or the other.

We have increased our fair value estimate for wide-moat and newly renamed RTX Corp. to $112 from $106 as a result of a handful of updates to our long-term forecast ($3.50 of the increase is due simply to the mountain of cash flows in RTX's future being about six months closer than when we last published a model). Most of the information we learned in the July 26 quarterly results and discussion did not impact our valuation, but highlights included strong bookings for the F135 engine that powers the F-35 fighter and a number of missile resupply contracts. In conjunction with updated expectations by company management, we revised our 2023 revenue estimate upward slightly to reflect the pace of growth this year and trimmed our cash flow forecast due to an accelerated inspection schedule for turbine disks in Pratt & Whitney's PW1100 engines (which power mostly Airbus A320s). We do not think this manufacturing issue is a major concern, and it doesn't impact our valuation beyond a slight dip in 2023 cash flows.

RTX's businesses include Rockwell Collins' aerospace componentry and subassemblies, Pratt & Whitney's engines, and Raytheon's missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries, respectively, and is unique in its relatively even split between commercial and defense revenue; where most other firms in the industry are heavily skewed one way or the other.

We expect to maintain our $106 fair value estimate for wide-moat Raytheon Technologies in light of healthy progress it reported in the first quarterly results of 2023. Despite some lingering crimps in its specialized supply chain, the firm saw commercial wins in the quarter and provided transparency into its medium-term revenue and profit forecasts. Our perspective hasn't changed—the company has a very strong portfolio with solid profitability in view, and the shares are not cheap.

Raytheon Technologies' businesses include Rockwell Collins' aerospace componentry and subassemblies, Pratt & Whitney's engines, and Raytheon's missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries, respectively, and is unique in its relatively even split between commercial and defense revenue; where most other firms in the industry are heavily skewed one way or the other.

We expect to maintain our $106 fair value estimate for Raytheon Technologies in light of solid fourth-quarter and full-year 2022 results, though we'll revisit our detailed valuation assumptions after the 10-K is filed. Despite continued supply chain troubles, the firm is making steady progress toward ambitious cash flow generation goals following its megarestructuring completed in 2020.

Raytheon Technologies' businesses include Rockwell Collins' aerospace componentry and subassemblies, Pratt & Whitney's engines, and Raytheon's missiles, sensors, and communications offerings. The combined entity unites powerhouses in the commercial aerospace and defense contracting industries, respectively, and is unique in its relatively even split between commercial and defense revenue; where most other firms in the industry are heavily skewed one way or the other.

We have raised our fair value estimate of Raytheon Technologies to $106 per share from $96 to reflect the firm's steady progress toward ambitious post-merger goals, notwithstanding its share of widespread supply chain troubles. In particular, the firm's fairly aggressive de-levering of its balance sheet and promising signs of increased aftermarket revenues increase our confidence in management's ability and commitment to also grow operating margins over time.

Wide-moat-rated Raytheon Technologies reported mixed third-quarter results, as the recovery in commercial aerospace was partially offset by lingering supply constraints in the defense business. Sales of $16.9 billion missed FactSet consensus by 2%, while adjusted EPS of $1.21 outpaced expectations by 6% due to higher commercial aftermarket exposure. Management modestly lowered its 2022 sales guidance to reflect a more subdued abatement of supply constraints, although a tumultuous geopolitical environment and recovery in commercial aerospace propelled a $6 billion increase in backlog. We have maintained our $96 fair value estimate as we believe our long-term outlook remains intact.

Raytheon Technologies consists of United Technologies' aerospace businesses and legacy Raytheon, which are powerhouses in the commercial aerospace supply chain and defense prime contracting industries, respectively. The combined entity is unique in its relatively even balance between commercial aerospace and defense prime contracting; most other entities in the industry are heavily skewed one way or the other.

Raytheon Technologies consists of United Technologies' aerospace businesses and legacy Raytheon, which are powerhouses in the commercial aerospace supply chain and defense prime contracting industries, respectively. The combined entity is unique in its relatively even balance between commercial aerospace and defense prime contracting; most other entities in the industry are heavily skewed one way or the other.

Wide-moat-rated Raytheon Technologies posted continued improvement in its commercial aerospace businesses, though worsening supply chain problems in the defense businesses limited the bottom-line impact of this improvement. Sales of $16.3 billion missed FactSet expectations by 2.0%, but adjusted earnings per share of $1.16 beat these estimates by 3.4%. After adjusting our model for second-quarter earnings, we are increasing our fair value for Raytheon Technologies to $96 per share from $94 due to the time value of money.