Thematic evaluation
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RTX Corp. (RTX)

October 15, 2024

Compared to: Northrop Grumman Corp. (NOC) | General Dynamics Corp. (GD) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

RTX appears slightly overvalued based on its current P/E and EV/EBITDA multiples, which are above historical and industry averages. While the company has strong growth prospects and market positions, these seem to be already priced into the stock. The potential risks, including supply chain disruptions and geopolitical tensions, may not be fully reflected in the current valuation.

Key takeaways
  • RTX is a diversified aerospace and defense conglomerate with a strong asset base and a high level of debt.
  • The company's profitability is improving, driven by the recovery in commercial aerospace and strength in defense.
  • The company's liquidity position is strong, but its long-term solvency is a concern.
  • RTX is well-positioned for growth in the commercial aerospace and defense sectors, but faces a number of risks and threats, including global economic and political uncertainty, supply chain disruptions, and intense competition.
  • RTX's valuation is currently in line with its peers, but its stock price has been more volatile than XLK and its peers.
  • RTX's future outlook is positive, as the company is well-positioned to benefit from the continued growth in the commercial aerospace and defense sectors.
  • Overall, RTX is a complex company with a number of strengths and weaknesses. Investors should carefully consider these factors before making an investment decision.
Overvalued
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Evaluation summary

  1. Company Overview:

    • RTX is a diversified aerospace and defense conglomerate with a leading position in commercial aviation, military engines, and defense systems. The company operates through three principal business segments: Collins Aerospace, Pratt & Whitney, and Raytheon. RTX's major customers include aircraft manufacturers, airlines, the U.S. Department of Defense, and other government agencies. Key competitors include GE Aviation, Lockheed Martin, Northrop Grumman, and BAE Systems.
    • RTX's revenue is generated from the sale of aerospace and defense systems and services, including aircraft engines, avionics, aero structures, defense electronics, and missiles. The company's revenue is broken down into three segments: Collins Aerospace, Pratt & Whitney, and Raytheon. Collins Aerospace is the largest segment, generating approximately 35% of RTX's revenue. Pratt & Whitney is the second-largest segment, generating approximately 30% of RTX's revenue. Raytheon is the smallest segment, generating approximately 25% of RTX's revenue.
    • RTX's target market is global, with customers in both commercial and military sectors. The company's commercial aerospace business is focused on serving airlines and aircraft manufacturers. The company's defense business is focused on serving the U.S. Department of Defense and other government agencies.
    • For comparative analysis, we will be using the Technology Select Sector SPDR Fund (XLK) as a benchmark and General Dynamics Corp. (GD) and Northrop Grumman Corp. (NOC) as industry peers.

  2. Financial Performance:

    • RTX's revenue has been growing steadily in recent years, driven by strong demand in both the commercial aerospace and defense sectors. The company's revenue growth is sustainable, as it is driven by a robust demand environment across its end markets.
    • RTX's profitability is improving, as evidenced by the increasing gross profit margin, operating margin, and net profit margin. The company's return on average assets, return on average total equity, return on average total capital, and return on average invested capital are all above the industry average, indicating that the company is generating a high return on its assets and equity.
    • RTX's financial performance has been impacted by the Powder Metal Matter, which has resulted in a significant financial charge and operational disruption. However, the company has been able to mitigate the impact of this issue through its strong liquidity position and access to credit facilities.
    • Compared to its peers, RTX has generally outperformed GD and NOC over the past three years, particularly in the short-term periods (YTD, 1 Week, 1 Month, 6 Months, and 1 Year). However, RTX's performance has been less consistent over longer periods (2 Years and 3 Years).

  3. Operational Efficiency:

    • RTX's asset utilization efficiency is improving, as evidenced by the increasing gross profit margin. The company's focus on operational improvements, capacity expansion, and digital transformation initiatives to drive productivity is paying off, as evidenced by the increasing margins.
    • RTX's working capital management is efficient, as evidenced by the company's strong current ratio and quick ratio. The company's short-term liquidity position is strong, as evidenced by the increasing operating cash flow.
    • RTX's cash flow from operating activities is increasing, driven by the company's strong performance in its core businesses. The company's cash flow from investing activities is decreasing, reflecting the company's focus on streamlining its business and improving efficiency. The company's cash flow from financing activities is increasing, reflecting the company's commitment to shareholder returns and its strong liquidity position.
    • RTX's free cash flow generation is declining, which could be a red flag. The company's free cash flow generation is declining, which could be a red flag. The company's free cash flow generation is declining, which could be a red flag.
    • RTX's capital expenditure is increasing, reflecting the company's investments in capacity expansion and new technologies. The company's depreciation expense is also increasing, reflecting the aging of its asset base.
    • RTX's dividend and share repurchase sustainability is strong, as evidenced by the company's strong cash flow generation and commitment to shareholder returns.
    • Compared to its peers, RTX has a higher debt-to-equity ratio and leverage ratio than GD and NOC, indicating that RTX is more leveraged than its peers.

  4. Growth Opportunities:

    • RTX is well-positioned for growth in the commercial aerospace and defense sectors. The company is benefiting from the recovery in commercial air travel and the increasing demand for defense systems.
    • RTX is pursuing a number of strategic initiatives to drive growth, including investments in capacity expansion, new technologies, and portfolio optimization. The company is also focused on improving operational efficiency and reducing costs.
    • RTX's R&D pipeline is robust, with a focus on developing new technologies for both commercial and military applications. The company is investing in areas such as autonomous systems, artificial intelligence, and advanced materials.
    • RTX is expanding its geographic reach, with a focus on emerging markets such as Asia and the Middle East. The company is also expanding its presence in key defense markets such as the United States and Europe.
    • RTX's management team has a strong track record of executing on strategic plans. The company has a history of delivering on its commitments to shareholders.

  5. Risks and Threats:

    • RTX faces a number of risks and threats, including:
      • Exposure to global economic, political, and regulatory conditions, including government spending, trade policies, and geopolitical conflicts.
      • Reliance on U.S. and non-U.S. suppliers and commodity markets, subject to disruptions, delays, and price increases.
      • Challenges in developing, producing, and supporting new technologies and products.
      • Intense competition in the aerospace and defense industries.
      • Cybersecurity threats to IT infrastructure, products, and supply chain.
      • Compliance with complex government regulations, including export controls and environmental laws.
      • Pension and postretirement benefit plan obligations and assumptions.
      • Tax exposures and changes in tax laws.
      • Ongoing government investigations and disputes related to cost accounting standards and contract pricing.
      • Lawsuits alleging improper payments and securities law violations related to the Powder Metal Matter disclosure.
      • Environmental enforcement proceeding by the Colorado Department of Public Health and Environment.
    • RTX's competitive landscape is intense, with a number of large and well-established players. The company is facing increasing competition from both domestic and international rivals.
    • RTX is subject to a number of regulatory risks, including government contracting regulations, export controls, and environmental laws. The company's compliance with these regulations is essential to its success.

  6. Valuation Analysis:

    • RTX's valuation is currently in line with its peers. The company's P/E ratio, EV/EBITDA ratio, and other valuation metrics are similar to those of GD and NOC.
    • RTX's valuation is expected to be driven by the company's growth prospects, profitability, and cash flow generation. The company's strong financial performance and strategic initiatives are expected to support its valuation.
    • Potential catalysts for RTX's valuation include:
      • Continued growth in the commercial aerospace and defense sectors.
      • Successful execution of the company's strategic initiatives.
      • Improvements in the company's free cash flow generation.

  7. Price Performance:

    • RTX's stock price has outperformed the Technology Select Sector SPDR Fund (XLK) in the short term (YTD, 1 Week, 1 Month, 3 Months, 6 Months, and 1 Year). However, RTX's stock price has underperformed XLK in the longer term (2 Years and 3 Years).
    • RTX's stock price has been more volatile than XLK, as evidenced by its higher beta. RTX's stock price has also been more volatile than GD and NOC, as evidenced by its higher maximum drawdown.
    • RTX's stock price performance has been impacted by the Powder Metal Matter, which has resulted in a decline in the company's stock price. However, the company's stock price has recovered somewhat in recent months.

  8. Future Outlook:

    • RTX's future outlook is positive, as the company is well-positioned to benefit from the continued growth in the commercial aerospace and defense sectors. The company's focus on operational improvements, capacity expansion, and digital transformation initiatives is expected to enable it to meet the unprecedented demand in its end markets.
    • RTX's management team is confident in the company's ability to navigate the current environment, which is characterized by supply chain disruptions, inflation, and OE production rate uncertainty. The company's strong financial position and strategic initiatives are expected to support its long-term growth.
    • Analyst estimates for RTX's future performance are generally positive. The company's strong financial performance and growth prospects are expected to drive its future earnings and cash flow.

  9. Summary:

    • RTX is a diversified aerospace and defense conglomerate with a strong asset base and a high level of debt. The company's profitability is improving, driven by the recovery in commercial aerospace and strength in defense. The company's liquidity position is strong, but its long-term solvency is a concern.
    • RTX's focus on operational improvements, capacity expansion, and digital transformation initiatives is expected to enable it to meet the unprecedented demand in its end markets. The company's large and growing installed base, industry-leading defense capabilities, and investments in sustainability and advanced technologies position the company well for long-term growth.
    • RTX faces a number of risks and threats, including global economic and political uncertainty, supply chain disruptions, and intense competition. The company's ability to navigate these challenges will be critical to its future success.
    • RTX's valuation is currently in line with its peers. The company's strong financial performance and growth prospects are expected to support its valuation.
    • RTX's stock price has outperformed the Technology Select Sector SPDR Fund (XLK) in the short term, but its longer-term performance has been weaker. The company's stock price is more volatile than XLK and its peers.
    • RTX's future outlook is positive, as the company is well-positioned to benefit from the continued growth in the commercial aerospace and defense sectors. The company's strong financial position and strategic initiatives are expected to support its long-term growth.
    • Overall, RTX is a complex company with a number of strengths and weaknesses. The company's strong financial performance and growth prospects are attractive, but its high level of debt and exposure to global risks are concerns. Investors should carefully consider these factors before making an investment decision.
Peer fundamentals 
Fundamentals
Insights
  • RTX is a diversified aerospace and defense conglomerate with a strong asset base and a high level of debt.
  • The company's profitability is improving, driven by the recovery in commercial aerospace and strength in defense.
  • The company's liquidity position is strong, but its long-term solvency is a concern.
  • The company's focus on operational improvements, capacity expansion, and digital transformation initiatives is expected to enable it to meet the unprecedented demand in its end markets.
  • The company's future cash flows are likely to be impacted by the company's strategic initiatives, such as the investments in capacity expansion and the streamlining of its business structure.
  • The company's future free cash flow is likely to be impacted by the company's legal and contract-related charges.
  • The company's future cash flows are likely to be impacted by the company's ability to navigate the current environment, which is characterized by supply chain disruptions, inflation, and OE production rate uncertainty.
Analysis
  • Revenue - RTX's revenue is increasing, driven by strong demand in both the commercial aerospace and defense sectors. - The company's revenue growth is sustainable, as it is driven by a robust demand environment across its end markets. - The company's revenue growth is linked to new product launches, market expansion, and pricing strategies. - The company's revenue growth is being impacted by macroeconomic factors, such as inflation and exchange rates.
    • Profitability
      • RTX's profitability is improving, as evidenced by the increasing gross profit margin, operating margin, and net profit margin.
      • The company's return on average assets, return on average total equity, return on average total capital, and return on average invested capital are all above the industry average, indicating that the company is generating a high return on its assets and equity.
      • The company's focus on operational improvements and cost management is paying off, as evidenced by the increasing margins.
    • Liquidity
      • RTX's liquidity position is strong, as evidenced by the current ratio above 1 and the increasing operating cash flow.
      • The company's short-term liquidity position is strong, as evidenced by the increasing operating cash flow.
      • The company's financial flexibility is strong, as evidenced by its access to credit facilities and ability to generate operating cash flow.
    • Solvency
      • RTX's financial leverage is high, as evidenced by the total debt to total equity ratio and debt / EBITDA.
      • The company's long-term solvency is a concern, as its free cash flow generation is declining.
      • The company's capital structure is heavily reliant on debt, which could constrain its strategic options in the future.
    • Operational Efficiency
      • RTX's asset utilization efficiency is improving, as evidenced by the increasing gross profit margin.
      • The company's focus on operational improvements, capacity expansion, and digital transformation initiatives to drive productivity is paying off, as evidenced by the increasing margins.
    • Cash Flow Analysis
      • RTX's cash flow from operating activities is increasing, driven by the company's strong performance in its core businesses.
      • The company's cash flow from investing activities is decreasing, reflecting the company's focus on streamlining its business and improving efficiency.
      • The company's cash flow from financing activities is increasing, reflecting the company's commitment to shareholder returns and its strong liquidity position.
      • The company's free cash flow generation is declining, which could be a red flag.
      • The company's cash flow projections are consistent with historical trends.
    • Risk Factors
      • The company's exposure to global economic, political, and regulatory conditions, including government spending, trade policies, and geopolitical conflicts, is a significant risk factor.
      • The company's reliance on U.S. and non-U.S. suppliers and commodity markets, subject to disruptions, delays, and price increases, is a significant risk factor.
      • The company's challenges in developing, producing, and supporting new technologies and products, is a significant risk factor.
      • The company's intense competition in the aerospace and defense industries, is a significant risk factor.
      • The company's cybersecurity threats to IT infrastructure, products, and supply chain, is a significant risk factor.
      • The company's compliance with complex government regulations, including export controls and environmental laws, is a significant risk factor.
      • The company's pension and postretirement benefit plan obligations and assumptions, is a significant risk factor.
      • The company's tax exposures and changes in tax laws, is a significant risk factor.
      • The company's ongoing government investigations and disputes related to cost accounting standards and contract pricing, is a significant risk factor.
      • The company's lawsuits alleging improper payments and securities law violations related to the Powder Metal Matter disclosure, is a significant risk factor.
      • The company's environmental enforcement proceeding by the Colorado Department of Public Health and Environment, is a significant risk factor.
    • Future Outlook
      • RTX's future outlook is positive, as the company is well-positioned to benefit from the continued growth in the commercial aerospace and defense sectors.
      • The company's focus on operational improvements, capacity expansion, and digital transformation initiatives is expected to enable it to meet the unprecedented demand in its end markets.
      • The company's large and growing installed base, industry-leading defense capabilities, and investments in sustainability and advanced technologies position the company well for long-term growth.
      • The company's future cash flows are likely to be impacted by the company's strategic initiatives, such as the investments in capacity expansion and the streamlining of its business structure.
      • The company's future free cash flow is likely to be impacted by the company's legal and contract-related charges.
      • The company's future cash flows are likely to be impacted by the company's ability to navigate the current environment, which is characterized by supply chain disruptions, inflation, and OE production rate uncertainty.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-11)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison: RTX has shown a mixed performance compared to XLK. While RTX has outperformed XLK in the short term (YTD, 1 Week, 1 Month, 3 Months, 6 Months, and 1 Year), it has underperformed in the longer term (2 Years and 3 Years). This suggests that RTX may be more susceptible to market fluctuations in the longer term.
  • Risk and Return Analysis: RTX has provided higher annualized returns than XLK in the 1-year period, but has underperformed in the 2-year and 3-year periods. This suggests that RTX may be more volatile than XLK, leading to higher returns in bull markets but lower returns in bear markets.
  • Risk-Adjusted Performance: RTX has consistently shown a higher Sharpe Ratio than XLK, indicating a better risk-adjusted return. This suggests that RTX is able to generate higher returns for the level of risk it takes on.
  • Overall Assessment: RTX has shown a strong short-term performance, outperforming XLK in most periods. However, its longer-term performance has been weaker, suggesting a higher level of volatility. Despite this, RTX has consistently shown a better risk-adjusted return than XLK, as evidenced by its higher Sharpe Ratio. RTX's lower beta value also indicates a lower risk profile compared to XLK. Overall, RTX appears to be a more volatile stock than XLK, but it may offer a better risk-adjusted return for investors who are willing to accept a higher level of risk.
Peers Price History(as of 2024-10-11)
Northrop Grumman Corp. (NOC)General Dynamics Corp. (GD)
  • Performance Comparison: RTX has generally outperformed GD and NOC over the past three years, particularly in the short-term periods (YTD, 1 Week, 1 Month, 6 Months, and 1 Year). However, RTX's performance has been less consistent over longer periods (2 Years and 3 Years).
  • Risk and Return Analysis: RTX has provided higher returns than GD and NOC over the past three years, but it has also been more volatile. RTX's maximum drawdown of 33.74% is significantly larger than GD's 19.27% and NOC's 22.28%, indicating that RTX is a riskier investment.
  • Risk-Adjusted Performance: RTX's Sharpe Ratio has generally been lower than GD and NOC, indicating that RTX's risk-adjusted returns have been lower than those of its peers. RTX's higher beta also suggests that it is a riskier investment than GD and NOC.
  • Overall Assessment: RTX has shown strong performance in recent periods, but its higher volatility and lower risk-adjusted returns suggest that it is a riskier investment than GD and NOC. Investors seeking higher returns may be willing to accept RTX's higher risk, but those seeking a more stable investment may prefer GD or NOC.
Peers Fundamentals(as of 2024-06-30)
Northrop Grumman Corp. (NOC)General Dynamics Corp. (GD)

  1. Market Position and Size:

    • RTX is the largest company in the peer group, with a market capitalization of 154,507 million, significantly exceeding General Dynamics Corp. (GD) at 80,507.2 million and Northrop Grumman Corp. (NOC) at 72,294.8 million.
    • RTX's market cap is 73,999.8 million greater than GD and 82,212.2 million greater than NOC.
    • RTX's size advantage is reflected in its financial performance, with higher revenue, EBITDA, and net income compared to its peers.
    • RTX's dominant market position gives it a significant competitive advantage in the industry.

  2. Profitability and Efficiency:

    • RTX's profitability metrics are mixed compared to its peers and industry averages.
    • While RTX's gross profit margin and EBITDA margin are competitive within the industry, its net profit margin is significantly lower than its peers.
    • RTX's return on average assets, return on average total equity, return on average total capital, and return on average invested capital are all significantly lower than its peers, despite its larger size and market position.
    • This suggests that RTX's profitability and efficiency are not key strengths compared to its peers.

  3. Financial Health and Stability:

    • RTX's liquidity and debt position are concerning compared to its peers and the industry average.
    • Its current ratio and quick ratio are lower than its peers and the industry average, indicating a potential risk of short-term financial distress.
    • Additionally, its total debt to total equity ratio and debt / EBITDA ratio are higher than its peers and the industry average, indicating a potential risk of financial distress.
    • This suggests that RTX's financial health is not as strong as its peers, despite its larger size and market position.

  4. Valuation and Market Perception:

    • RTX's valuation is mixed compared to its peers and the industry average.
    • While its EV/Sales and EV/EBITDA ratios suggest undervaluation, its P/E ratio indicates overvaluation.
    • This suggests that RTX's valuation is not a clear indicator of its investment attractiveness.

  5. Cash Flow and Capital Management:

    • RTX's cash flow generation strength is significantly higher than its peers, considering their respective market caps.
    • This suggests that RTX's cash flow generation is a key strength compared to its peers.
    • RTX invests more heavily in its operations than its peers, as evidenced by its higher capital expenditure.
    • This suggests that RTX is committed to growth and innovation, which could lead to future profitability.

  6. Growth and Future Prospects:

    • RTX's growth trends are mixed compared to its peer group average.
    • RTX shows consistently higher growth in free cash flow and free cash flow margin compared to the peer group average.
    • However, RTX shows consistently lower growth in sales, EBITDA, net income, basic earnings per share, total assets, book value per share, and EBIT margin compared to the peer group average.
    • RTX's growth is concentrated in specific areas, particularly in free cash flow and free cash flow margin.
    • This suggests that RTX's growth is not balanced across different metrics and may not be sustainable in the long term.

  7. Potential for Investment:

    • RTX's investment attractiveness is mixed.
    • While RTX is a strong cash flow generator and has a dominant market position, it has lower profitability, high debt levels, and lower efficiency in generating returns compared to its peers.
    • Additionally, its valuation is not a clear indicator of its investment attractiveness.
    • This suggests that RTX may not be as attractive an investment as its peers, despite its larger size and market position.

  8. Key Risks and Considerations:

    • RTX's lower profitability, high debt levels, and lower efficiency in generating returns compared to its peers are key risks for investors.
    • RTX's growth is not balanced across different metrics and may not be sustainable in the long term.
    • RTX's valuation is not a clear indicator of its investment attractiveness.

  9. Overall Assessment:

    • RTX is a large and dominant player in the aerospace and defense industry, with strong cash flow generation capabilities.
    • However, RTX's financial health is not as strong as its peers, due to lower profitability, high debt levels, and lower efficiency in generating returns.
    • RTX's growth is not balanced across different metrics and may not be sustainable in the long term.
    • RTX's valuation is not a clear indicator of its investment attractiveness.
    • Overall, RTX's financial position, performance, and outlook are mixed compared to its peer group and industry.