Streamlining Operations And Embracing Innovation Fuels Robust Future In Aerospace & Defense

Key Takeaways

• Record backlog and robust demand in defense and commercial sectors signal strong potential revenue growth.
  
• Strategic capital returns and process efficiency initiatives drive potential earnings per share growth and net margin improvements.
  
• Supply chain and certification challenges, inflation pressures, and potential disruptions may impact production, margins, and cash flow for RTX.

Catalysts

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

• The increase in backlog to a record $221 billion, driven by robust demand in both defense and commercial sectors, is a strong indicator of future revenue growth potential.
  
• The strategic investments in Industry 4.0 initiatives and automation to expand production capacities, such as the new Pratt & Whitney facility in Oklahoma, are likely to enhance efficiency and improve net margins.
  
• The incorporation of next-generation technologies, like hybrid electric propulsion and advanced materials for hypersonic systems, suggests potential revenue growth from future product offerings.
  
• Actions to streamline processes and reduce costs, like eliminating over 265 systems and leveraging common supply chain processes, are expected to drive net margin improvements across the organization.
  
• The successful completion of $10.3 billion in share repurchases and the strong free cash flow generation indicate potential for significant earnings per share (EPS) growth through strategic capital returns to shareholders.

RTX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RTX's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $7.9 billion (and earnings per share of $5.9) by about November 2027, up from $4.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.4x on those 2027 earnings, down from 33.6x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.3x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

RTX Future Earnings Per Share Growth

Risks

• Ongoing supply chain challenges, including the need for key components like isothermal forgings and structural castings, may impact production capacity and eventually affect revenue and margins if not resolved.
  
• The pressure from inflation and the need to renew long-term agreements could challenge cost structures, affecting net margins if pricing cannot be adequately adjusted for heightened costs.
  
• The challenges in the FAA certification process for Collins' interiors and seating products may delay deliveries and rollout, potentially affecting Collins' revenue streams and margin recovery.
  
• Potential disruptions from Boeing's work stoppage could impact Collins' and RTX's overall sales and profits, particularly if the resolution takes longer than expected, affecting current and future revenue.
  
• Continued payments related to GTF engine customer compensations, while currently manageable, could create cash flow pressures and impact free cash flow expectations over the coming years.

Valuation

• The analysts have a consensus price target of $134.1 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 2027, revenues will be $92.8 billion, earnings will come to $7.9 billion, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of $118.96, the analyst's price target of $134.1 is 11.3% higher.
• 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.