RTX's (NYSE: RTX) latest earnings report contained more pluses than minuses, and the stock is attractive for investors looking to invest in the aerospace and defense industry. Is it a stock most investors should want to add to their portfolio?
Here's how to think about RTX in the context of its recently released earnings report.
RTX delivers where it can
It's been a good year for the company, with the stock up 47% year to date. Moreover, the recent third-quarter earnings contained several positives. There were some negatives, too, but they look like temporary issues that will be resolved in time, and the long-term investment case remains positive.
Chris Calio has only been CEO since the start of May, but he's already demonstrated he is in touch with what investors want to see from the company. Back in May he laid out three key things the company needs to do, one from each of the three segments.
He told investors Pratt & Whitney needed to execute the geared turbofan (GTF) fleet management plan; the good news is the engine removals and inspections are on track. He argued that the defense business, Raytheon, needs to deliver on backlog and improve margins; it's doing so and continues to generate orders and grow its backlog. For example, Raytheon reported a record figure of $16.6 billion in orders in the third quarter, helping take its backlog to $60 billion, compared to $52 billion at the end of 2023.
He also told investors that Collins Aerospace, a commercial aerospace-focused business, needs to expand margins as it grows sales. The last of three objectives is proving more challenging to achieve, as its commercial original equipment (OE) sales are being hit (down 8% in the third quarter) due to weaker-than-expected airplane production this year by both Airbus and, in particular, Boeing.
Image source: Getty Images.
RTX adjusts its outlook
The weakness in the commercial aerospace OE is, just as in the case of GE Aerospace, being offset by more robust commercial aftermarket sales as older planes continue running. Still, RTX lowered its earnings guidance for Collins while raising it for Raytheon and Pratt & Whitney.
Adjusted Operating Profit | FY 2023 | Improvement in 2024 (July) | Improvement in 2024 (October) | Change |
|---|---|---|---|---|
Collins Aerospace | $3.9 billion | $650 million-$725 million | $575 million-$650 million | Lower |
Pratt & Whitney | $1.69 billion | $400 million-$475 million | $475 million-$525 million | Higher |
Raytheon | $2.43 billion | $125 million-$200 million | $200 million-$250 million | Higher |
Data source: RTX presentations.
When all is said and done, RTX raised its overall full-year sales and earnings guidance:
- Adjusted sales to be $79.25 billion to $79.75 billion, compared to prior guidance of $78.75 billion to $79.5 billion
- Adjusted EPS of $5.50-$5.58, compared to period guidance of $5.35-$5.45
As such, the improvements in the defense business, across Raytheon and Pratt & Whitney's military business, as well as the commercial aerospace aftermarket, are more than offsetting weakness in commercial OE.
Why investors have reason for optimism
Calio's succinct description of RTX's growth prospects on the earnings call, "We've got an installed base in commercial aerospace that has a long aftermarket tail and leading defense franchises that are seeing record global demand," perfectly sums up the case for the stock, and why investors should feel confident over its future, and a bit more so after these earnings.
There are three key reasons. First, the GTF (an engine on the Airbus A320neo family of airplanes) is being derisked by the successful execution of the inspections program, which is good for the GTF's "long aftermarket tail" of revenue.
Second, the improvement in defense margins (Raytheon's return on sales improved to 10.4% from 8.8% in the same period last year) is a welcome improvement and a sign that the company is starting to work through a problematic backlog secured in less inflationary times. Meanwhile, as Lockheed Martin noted, defense demand is being led by missiles and rocket systems.
Third, the weakness in commercial OE is unlikely to prove to be long-term, as Boeing and Airbus have multiyear backlogs and will do everything necessary to ramp up production in the future.
Image source: Getty Images.
A stock to buy?
RTX is a more attractive stock post-earnings, but valuations still matter, and trading at slightly more than 20 times its estimated 2025 earnings, RTX doesn't look like a great value. In common with Lockheed Martin, RTX stock looks like a lot of the positive news on missile demand is already baked in the price, but if RTX can keep improving its defense business margins, that view might need reassessing, because the company delivered where it could in the third quarter.
Should you invest $1,000 in RTX right now?
Before you buy stock in RTX, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and RTX wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $829,746!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of October 28, 2024
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
