RTX Has a $340 Billion Backlog and Trades at 32 Times Earnings. Is It the Best Defense Stock to Buy Right Now?
Key Points
RTX's mix of commercial aerospace and defense businesses positions it well across a range of market conditions.
Valuation analysis shows RTX is fairly valued versus peers.
- 10 stocks we like better than RTX ›
RTX's (NYSE: RTX) recent results strengthened the investment case, with management raising guidance for sales, earnings, and cash flow. It's probably the most attractive defense company on the market, with a $340 billion backlog and a long stream of commercial aerospace original equipment and aftermarket revenue, balanced with a relatively low-risk defense business. Still, is it the best-value defense stock?
Picking peers for RTX
I think RTX is better positioned than Lockheed Martin (NYSE: LMT), and commercial-aerospace-focused GE Aerospace (NYSE: GE) is a very strong company. I will use those companies as benchmarks for defense and commercial aerospace valuations to see whether RTX is a good value.
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Unfortunately, RTX doesn't break out its defense and commercial aerospace earnings separately, but we know the Raytheon segment is almost entirely defense, and Collins Aerospace and Pratt & Whitney account for roughly 30% of revenue, so let's assume their operating profit is in line with revenue.
Valuing RTX stock
Let's put aside the current valuation of 32 times trailing earnings, and instead focus on what investors can expect in the future. Based on Wall Street analyst consensus from S&P Global Market Intelligence, for 2027 enterprise value (market cap plus net debt) over operating income, Lockheed Martin trades at 13.8 times operating income, and GE Aerospace at 25.1 times. Let's use these valuations as a proxy for RTX's defense businesses and its commercial aerospace businesses, so the former is valued at 13.8 times operating income and the latter at 25.1 times.
If 30% of RTX-Collins Aerospace and RTX-Pratt & Whitney is in defense and 70% in commercial aerospace then it follows that those segments should be valued at 70%*25.1+30%*13.8 = 21.7 times operating income.
Plugging these valuations into the table below, valuing Raytheon purely as a defense business, and utilizing the Wall Street consensus for each segment's operating income in 2027, gives the following:
|
RTX Segment |
Operating Income 2027 |
Enterprise Value/Operating Income |
Enterprise Value |
|---|---|---|---|
|
Raytheon |
$4,502 million |
13.8x |
$62,218 million |
|
Collins Aerospace |
$6,176 million |
21.7x |
$134,019 million |
|
Pratt & Whitney |
$3,596 million |
21.7x |
$78,033 million |
|
Total |
$14,274 million |
19.2x |
$274,270 million |
Data source: S&P Global Market Intelligence.
Given that the market expects RTX to have net debt of $22.6 billion in 2027, the theoretical market cap ($274.27 billion-$22.6 billion) is $251.7 billion, or $186 per share, compared with the current price of $192.
What that means to investors
These back-of-the-envelope calculations suggest RTX is fairly valued relative to its peers, but if you think it's a better business than Lockheed Martin, then it's a better stock to buy. However, it's more of a long-term buy-and-hold stock than one that screams "unbeatable value" right now.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends GE Aerospace, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.
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