It’s no secret that the stock market can experience significant volatility, moving sharply either up or down. These swings can quickly impact analysts’ ratings for a stock; within months, weeks, or even days, a “Buy” recommendation might shift to a “Hold” and vice versa. RTX Corporation (RTX), a leading aerospace and defense contractor, exemplifies this market volatility, having rallied 49% so far in 2024.
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Even if a stock starts from a point of substantial undervaluation, as I believe was the case for RTX, this rally appears to have overextended its share price. Therefore, I believe it is too late to buy the stock, and I am initiating coverage with a Hold rating.
RTX’s Sales and Earnings Flew Higher in Q3
RTX’s third-quarter earnings results, released on October 22, were undoubtedly strong, which is one reason I’m bullish on them operationally but not overall (more on that to come in my discussion of the valuation). The company’s sales climbed 6% year-over-year to $20.1 billion for the quarter, exceeding the analyst consensus by $300 million. This growth was led by a double-digit topline increase in the Pratt & Whitney segment, driven by higher aftermarket demand and a greater mix of higher-priced, larger commercial engines.
RTX’s adjusted diluted EPS rose 16% over the year-ago period to $1.45 in the third quarter, beating the analyst consensus by $0.11. Additionally, RTX’s non-GAAP net profit margin improved by nearly 10 basis points to 9.7% during the quarter. Coupled with a 7% decline in the average diluted share count due to share repurchases, this is how adjusted diluted EPS growth outpaced sales growth in the quarter.
RTX Sets Another Record-High Backlog
Another reason I like RTX’s fundamentals is its phenomenal backlog. As of September 30, the company ended the third quarter with a record backlog of $221 billion, equivalent to nearly three years of revenue at the current pace. For context, this represents a significant increase from the $206 billion backlog as of June 30. Strong new Defense orders ($25 billion) and Commercial orders ($11 billion) resulted in a book-to-bill ratio of 1.8 for the quarter.
Defense orders for the quarter included $1.9 billion in Lower Tier Air Missile Defense Systems and a $1.3 billion contract at Pratt for continued development of the F-135 engine core upgrade program. On the Commercial side, Collins was awarded a $470 million contract by the Federal Aviation Administration for continued technical refresh and enhancement of its air traffic control automation system. These were just a few of the new contracts contributing to the substantial uptick in the backlog during the quarter.
As a result of RTX’s growing backlog, the analyst outlook for the company is positive. Adjusted diluted EPS is expected to rise by 10.1% in 2024 to $5.57. Beyond this year, another 9% increase in adjusted diluted EPS to $6.07 is projected for 2025. By 2026, an additional 14.1% surge in adjusted diluted EPS to $6.93 is anticipated.
RTX’s Dividend Is Sustainable
RTX’s dividend is yet another reason that I am glad to own the stock. Its 2% dividend yield is moderately greater than the 1.2% yield of the S&P 500 index (SPX). The company’s payout ratio is also set to be in the mid 40% range for 2024, which positions it for dividend growth about as fast as earnings growth. That’s why I’m confident the dividend can keep compounding at a high-single-digit rate annually for the foreseeable future.
RTX’s Financial Positioning Is Strong
RTX’s balance sheet is a characteristic that I also appreciate. The company’s interest coverage ratio through the first nine months of 2024 was 4. The debt-to-capital ratio in the high 30% range is another element that suggests the company’s capitalization is manageable. This is why S&P Global (SPGI) awards a BBB+ credit rating to RTX.
RTX Stock Looks Pricey
As I alluded to at the outset, RTX is a fundamentally strong business. The only factor holding me back from an overall bullish sentiment is the stock’s valuation. RTX’s current-year P/E ratio of 22.2x is higher than its 10-year average of 18x. Even the forward P/E ratio of 20.4x indicates that the stock is fully valued. This is because RTX’s forward growth prospects are similar to the growth that it delivered in the past. That’s why I would contend the fair value multiple should still be around 18x.
Is RTX a Buy, According to Analysts?
Shifting to Wall Street, analysts have a Moderate Buy rating consensus on RTX. Among 15 analysts, six have issued Buy ratings and nine have assigned Hold ratings in the past three months. The average 12-month RTX price target of $132.47 equates to a 7.22% upside from current price levels.
Key Takeaway
RTX is a business firing on all cylinders. The company’s backlog has never been stronger. The dividend is easily covered and has room to fly higher. RTX’s corporate credit rating is firmly investment-grade. Until the stock either experiences a correction and/or earnings estimates move higher, I’m starting coverage with a neutral rating.
