Is RTX Still a Smart Pick After Surging 35% and Raytheon Engine Deal News?

Deciding what to do with RTX stock right now? You are not alone. This American industrial heavyweight has captured plenty of investor attention in 2024, bouncing back with an impressive 34.7% gain year-to-date. In fact, over the past year, RTX has notched a total return of 35.1%. The stock has steadily climbed out of last year’s uncertainty, in part due to rebounding defense contracts and a brightening outlook in the aerospace sector.

Market sentiment seems to have shifted as well. Recent analyst commentary points to renewed faith in the long-term earnings power of RTX, highlighted by a modest 4% discount to consensus analyst price targets. This still offers some upside but indicates that investors are paying closer attention. Notably, the company registered 4.9% revenue growth and an even sharper 11.6% expansion in net income over the last year. That momentum has not gone unnoticed, with optimism growing regarding both its recovery and future growth prospects.

But are shares actually cheap? That is the question investors are now wrestling with. According to a standard valuation check, RTX scores 1 out of 6, meaning it only meets undervaluation criteria in one major metric. There is considerable debate as to whether this fairly captures RTX's real value. Next, we will break down exactly how these valuation methods work. At the end of this article, we will look at an alternative angle that may provide an even clearer perspective on RTX's worth.

RTX delivered 35.1% returns over the last year. See how this stacks up to the rest of the Aerospace & Defense industry.

Approach 1: RTX Cash Flows

The Discounted Cash Flow (DCF) model is a widely used method to estimate a company's value by projecting its future cash flows and discounting them back to today's value. This approach helps investors gauge what a business might truly be worth, beyond the current trading price.

For RTX, current Free Cash Flow stands at approximately $2.4 billion. Analyst forecasts suggest consistent growth in cash flow, with projections rising to $10.7 billion by 2029. Looking ahead ten years, estimates indicate the company could generate around $11 billion in annual free cash flow. This highlights solid long-term expectations for the industrial giant.

Based on these projections, the DCF model calculates an intrinsic fair value of $130.19 per share. However, compared to RTX's recent trading price, this valuation suggests the stock is about 20.1% overvalued. While the business outlook is strong, the market appears to have already factored in much of this optimistic growth scenario.

Result: OVERVALUED

Our DCF analysis suggests RTX may be overvalued by 20.1%. Find undervalued stocks based on DCF analysis or create your own screener to find better value opportunities.

Approach 2: RTX Price vs Earnings

For profitable companies like RTX, the Price-to-Earnings (PE) ratio is a popular and widely accepted metric to judge valuation. This ratio gives investors a quick way to measure how much they are paying for each dollar of a company’s earnings. It is an effective tool for comparing companies within the same sector.

It is important to remember that what makes a PE ratio "fair" depends on several factors, especially the company’s long-term growth prospects and its risk profile. Higher expected growth and lower risk often justify a higher PE, while slower or riskier companies usually trade at lower multiples. Industry averages and the multiples of similar companies offer helpful benchmarks to keep expectations grounded.

Currently, RTX trades at a PE of 34.0x. This is just below the Aerospace and Defense industry average of 34.2x and higher than the peer group average of 26.2x. Simply Wall St’s proprietary Fair PE Ratio for RTX is 32.9x, calculated from a blend of company growth, profitability, and risk metrics. Given the narrow difference between the fair ratio and the actual PE (less than 0.10), RTX appears to be priced just about right based on earnings multiples.

Result: ABOUT RIGHT

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Upgrade Your Decision Making: Choose your RTX Narrative

Narratives are more than just numbers; they are your story about how a company like RTX will perform, connecting management’s strategy, business strengths, and risks to concrete financial forecasts and a reasoned fair value.

Rather than passively accepting consensus targets or rigid models, Narratives give every investor an approachable way to turn their research and opinions into an actionable forecast for revenue, earnings, and margins. Investors can then compare their own fair value to the current price to see if RTX is a buy, hold, or sell for them personally.

On Simply Wall St, Narratives make this process simple and collaborative. You can quickly choose your preferred story, see how it affects RTX’s valuation, and update your perspective as new information, news, or earnings come in, just like millions of other investors in the community.

For example, one investor may be optimistic about global defense spending and price RTX at $180, while another more cautious investor, concerned about engine costs and aviation headwinds, might see fair value at $134.

Do you think there's more to the story for RTX? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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