The Case For and Against Buying RTX Stock Right Now

Given the ongoing military conflict in the Middle East, there's an obvious case to be made for opening a stake in RTX (NYSE: RTX), the company previously known as Raytheon, predominantly known for manufacturing missiles. Some of its industry peers, in fact, have edged higher since early March largely for this very reason.

An obvious trade isn't always a good one, though. Sometimes a prospect is so obvious to everyone that there's little to no upside left to tap. Indeed, seemingly bullish news can often start a wave of profit-taking if that ticker is already overextended or overvalued.

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The case for RTX stock

Curiously, this stock hasn't made any gains since the attacks in and around Iran began; as noted, sometimes the obvious trade is too obvious.

Nevertheless, there's an indirect bullish argument rooted in the current conflict. That's rekindled worry that this war will stoke a long-lived perceived need for more and newer defensive capabilities all over the world. We're already seeing it, in fact. Case in point: Last month, Greece earmarked several billion euros to modernize much of its military to shield itself from remote attacks launched by neighboring countries.

Although the conflict in Iran could end by the time government budgets for military spending are officially expanded, RTX's already-big backlog of $268 billion (versus last year's revenue of $88.6 billion) could certainly get much bigger.

The case against RTX stock

Still, that backlog represents business that will take years to turn into reportable revenue. Even if its current customers request accelerated deliveries of expanded orders, single-digit sales growth has been and will remain the norm here for the capacity-constrained company.

Now, modest sales growth isn't necessarily a reason not to buy or hold a stock; plenty of companies are slow growers. Most of those stocks, however, aren't also priced at 30 times their projected earnings for the year ahead like RTX is. And of the ones that pay dividends, most of them certainly offer a better forward-looking dividend yield than RTX's 1.4%.

The kicker: Although it leaves some room for a little upside, analysts' current consensus target of $219 per share is less than 10% above this ticker's present price.

The call

It's an admittedly simple analysis. But it's not a complicated matter. The aerospace industry is one that's always in demand, but also slow-moving simply because the massive capital expenditures it requires take some serious planning.

The defense industry is mostly government-funded, yet also slow and steady due to the tepid pace at which governments raise money and the political challenges of increasing any defense budget. These will never be bad businesses to be in, but never great ones either.

Whatever the case, given these two industries' reliable but slow-moving natures, RTX shares have worked their way into a valuation that doesn't quite make sense. The stock's currently more expensive (on a trailing and forward-looking basis) than it's been at any point in the past several years, in fact. That's going to hold it back at least for a while. The fact that it hasn't budged since a point in time when it superficially should have rallied speaks volumes about the dead weight the stock is currently carrying.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends RTX. The Motley Fool has a disclosure policy.