RTX Stands To Benefit From Secular Aerospace Growth and Growing Defense Budgets

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.

In commercial aerospace, Collins is one of the largest aircraft component and systems suppliers. We think its substantial scale gives it negotiating leverage with aircraft manufacturers, as it provides many systems and can selectively bid on critical components. Meanwhile, Pratt & Whitney is in the early innings of a long ramp-up of delivering thousands of the PW1000 family of geared turbofan, or GTF, jet engines, which power some of the popular Airbus A320neo and all A220 aircraft. With their long service life and the need for recurring overhauls, we see engines as well as some of Collins’ aerospace component businesses as fitting the razor-and-blade business model, with the razors original equipment sale (sometimes at low or no margins) and the blades recurring servicing and parts revenue (including actual turbine blades), often at high margins. Pratt continues to service older V2500 engines that power many A320s in service today. We see long-term tailwinds for the GTF as we believe the A320 family will be the dominant narrow-body aircraft of this generation.

In defense, Raytheon provides missiles, missile defense systems, sensors, and secure communications almost exclusively to government agencies. We expect the military’s increased focus on modernizing its capabilities to drive material investment in each of these areas. We expect a flattening, rather than declining, budgetary environment as heightened geopolitical tensions are likely to buoy spending despite the potential debt burden. For these reasons, in addition to existing backlogs, we think Raytheon’s businesses can continue growing despite a potentially slower overall macro environment.