RTX Corporation Stock: The Peace Dividend Is Gone (NYSE:RTX)

RTX Corporation (NYSE:RTX) is an American multinational aerospace and defense conglomerate, one of the largest in the world. The company has a market cap of more than $110 billion, but it’s been held back by the “peace dividend.” However, with Russia’s invasion of Ukraine, the largest European conventional war since WW2, and the Palestine – Israel War, times are changing.

Governments are realizing they’re behind. Europe’s entire annual artillery production capacity is 5 days of Russia’s peaking firing rate at Ukraine. In that world, we expect RTX to outperform.

Accelerating Capital Return

The company is focused on increasing capital returns for shareholders, using its financial strength.

The company has approved a $10 billion accelerated share repurchase program beginning immediately. That’s almost 10% of its outstanding shares. Over the next few years, the company expects shareholder returns to increase dramatically taking advantage of its share price. That’s on top of a respectable base dividend yield of 3%.

The downside here is the company is very committed to its share price. Despite its strong free cash flow (“FCF”), the majority of its share repurchases will be based on short-and-long-term debt, a leveraged bit during a time of higher interest rates. However, in the long run we do expect it to be profitable, given the current share price.

Q3 2023 Results

The company had strong performance in Q3, despite a short-term hiccup from its Pratt and Whitney division.

The company expects the impact to the Pratt fleet to be expensive, in the billions, but it’s a calculated and manageable cost. The company’s adjusted sales forecast is still at the top-end of its range of $74 billion for the year, with strong 10% organic sales growth. The company is expecting almost $5 billion in FCF for the year with $5 in adjusted EPS.

That gives the company a P/E of 16x, a strong P/E given its growth rate and performance near the top-end of its guidance. The company received $22 billion in new awards in the quarter, more than its quarterly revenue, and still maintains an incredibly strong backlog. We expect it to continue aggressive repurchases at its current price.

Segment Performance

The company’s segments had strong performance.

Pratt and Whitney sales and results were temporarily crushed, as a result of the impact of the powder metal matter, however, the company disclosed this before and has a path forward, it’s no surprise. In a normal environment, the company’s profit is almost $500 million, with sales of more than $6 billion and incredibly strong YoY growth.

The industry is an oligopoly, with minimal competition, and airfare demand is growing dramatically. Pratt and Whitney is incredibly well positioned for this.

Each of the company’s segment has had incredibly strong growth with a long runway. Raytheon might not make the F35 for example, the most expensive fighter jet program to date, but the company’s Pratt and Whitney division makes the engines. It’s also been selected for the Air Force’s brand new and highly secret bomber plane.

Each of the company’s divisions are strong. The company has long-term revenue forecasting with $190 billion in backlog and 13% YoY growth. Its defense backlog is alone a massive $75 billion and the company’s book value to billing is 1.26x. Growth remains in the double-digits across the industry, strong with a P/E of 16.

That strength will enable the company to drive strong returns.

Financial Strength

At the end of the day, the company’s financials are strong.

Sales are up by the double-digits with Collins Aerospace and Pratt & Whitney. Raytheon is up by the low-to-mid single digits. Backlog is growing. The company remains committed to its $5 billion in backlog for the year, and it’s using some modest debt to drive incredibly strong and immediate term shareholder returns.

It is committed to an investment grade credit rating, and we expect it to maintain that. Despite a 9% boost recently, from the Israel-Gaza war, the company is still down almost 25% from its peak. We expect it to generate strong long-term returns from its share repurchases, and the company is a valuable long-term investment.

Thesis Risk

The largest risk to our thesis is peace. Specifically, lasting peace due to a massive governmental shift. Examples are Russia or China losing their current dictators and becoming democracies allied with the Western world. We see this as incredibly unlikely, and even then RTX still has strong airplane, etc., divisions to help it diversify.

Still, in our view, it’s the most likely threat the company faces.

Conclusion

RTX Corporation makes a number of systems that are critical for the functionality of modern life. These are expensive and complex systems and in many segments, such as the Patriot Missile Defense system, the company has no competition. The world remains a dangerous place, as much as places like Europe financially benefited from a peace dividend.

We see a number of potential hotspots emerging as NATO’s status is threatened by both Russia and China along with various minor conflicts. As evidenced by its backlog, countries are scrambling for what RTX has to offer, and we expect the company’s revenue to increase along with its reliable FCF and returns.

The company’s utilization of debt for shareholder returns is potentially concerning. However, at its current FCF we see RTX Corporation as likely profitable. Let us know your thoughts in the comments below.