AI And Automation Investments Will Strengthen Future Competitiveness

Key Takeaways

• Robust demand in defense and commercial sectors, coupled with increased international defense spending, underpins potential revenue and margin growth.
  
• Strategic investments in innovation and operational efficiency are poised to reduce costs and grow long-term earnings through enhanced technologies and shareholder returns.
  
• Supply chain issues, inflationary pressures, divestitures, and geopolitical risks could negatively impact the company's revenue, margins, and financial performance.

Catalysts

An aerospace and defense company, provides systems and services for the commercial, military, and government customers in the United States and internationally.

• RTX's strong backlog of $218 billion, with $93 billion in defense and $125 billion in commercial, positions the company for future revenue growth as the robust demand for their technologies in commercial aerospace and defense continues. This is expected to drive revenue increases.
  
• The continued strength in international demand for RTX products, particularly in the defense sector, supported by increased defense spending among NATO and Indo-Pacific allies, is expected to boost both revenue and margins in their defense segment.
  
• RTX's investment in supply chain improvements and production capacity, including digital infrastructure and automation, is likely to enhance operational efficiency and reduce costs, potentially increasing net margins.
  
• The development and planned deployment of advanced technologies such as AI, autonomy, and directed energy solutions highlights RTX's focus on innovation, which is expected to support long-term revenue growth by expanding their product offerings and enhancing their competitive edge.
  
• RTX's commitment to returning capital to shareholders, with a clear line of sight to deliver towards the high end of their $36 billion to $37 billion capital return commitment by the end of 2025, should drive EPS growth through share buybacks and improved capital efficiency.

RTX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RTX's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $7.7 billion (and earnings per share of $5.73) by about January 2028, up from $4.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.9x on those 2028 earnings, down from 35.8x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.0x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.6%, as per the Simply Wall St company report.

RTX Future Earnings Per Share Growth

Risks

• Ongoing supply chain constraints, especially in critical components like structural castings and rocket motors, may hinder the company's ability to meet production demands, adversely affecting revenue and margins.
  
• The company faces inflationary pressures that could impact costs and margins, challenging its ability to achieve historical profit targets, which might suppress earnings growth.
  
• Potential headwinds from divestitures and reduced revenue from areas like cybersecurity and certain defense contracts could result in lower segment revenues and profits, impacting overall financial performance.
  
• The continued financial impact of the GTF powdered metal issue and ongoing support commitments might constrain cash flow and limit the company's ability to redirect funds to growth initiatives or shareholder returns.
  
• The high dependency on international defense spending, particularly in volatile geopolitical regions, carries risks of project delays or cancellations, which could lead to fluctuations in defense-related revenues and backlog.

Valuation

• The analysts have a consensus price target of $136.91 for RTX based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $157.0, and the most bearish reporting a price target of just $113.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $93.6 billion, earnings will come to $7.7 billion, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $128.35, the analyst's price target of $136.91 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.