RTX Corp. Earnings: A Few Upticks to Our Forecast, Turbine Disk Not a Big Concern; Fair Value $112

We have increased our fair value estimate for wide-moat and newly renamed RTX Corp RTX. 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.

We also updated our model to reflect RTX’s sale to Safran of Collins’ actuation and flight control business for $1.8 billion, with essentially offsetting impacts to longer-term revenue and profit streams, thus no effect on our valuation of RTX, which still has massive scale and cross-selling ability in its commercial aviation portfolio.

The remaining $2.50 of our increase in RTX’s valuation resulted from incorporating the company’s new structure as three focused segments: Collins Aerospace, which is inheriting a few billion dollars of commercial business (and people) from the legacy Raytheon businesses, Pratt & Whitney unchanged, and the remaining Raytheon missiles and communications businesses under one brand and one accounting roof. Some of the accounting is cleaner, with far less segment revenue eliminated from reporting because it transpired between business units and several million dollars of state income taxes moving from SG&A to the income tax line.