RTX: 31% Rebound Since October Lows, More Upside to Come
Company Update (RTX US) (Buy): Shares are still cheap with a 4%+ FCF Yield and FCF set to rise 60%+ between 2023 and 2025.
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Highlights
FCF guided to rise from $5.5bn to $9.0bn in 2023-25 ex. “powder metal”.
Collins and P&W have continued strong growth; Raytheon is improving.
Latest mgmt. comments indicate “powder metal” efforts are on track.
Valuation is cheap with 16.5x P/E, 4.2% FCF Yield and 2.6% Dividend Yield.
With shares at $89.95, we see a 57% return (18.0% p.a.) by 2026.
Introduction
We review our RTX investment case after shares have regained a further 13.6% since our last review (following RTX’s Q3 2023 results) on October 26, taking into account Q4 results as well as recent management comments.
We published our first public article on RTX with a Buy rating in May 2020, and since then shares have gained 51.1% in just under 4 years. RTX has also been part of our “Select 15” model portfolio since its inception at the start of 2023. In real life, RTX has been one of our core positions and we bought substantially more last September, at attractive prices both before and after the new “powder metal” “fleet management” plan was announced on September 11.
RTX shares have rebound 31.1% from its 52-week low last October, but we see further potential in the stock.
RTX Share Price (Last 1 Year)
Source: Google Finance (12-Mar-24).
We see RTX’s cash earnings growing substantially in the next few years, driven by both long-term structural growth and the resolution of recent headwinds. Excluding one-off “powder metal” cash costs, management expects Free Cash Flow (“FCF”) to grow from $5.5bn in 2023 to $9.0bn in 2025, which is less ambitious than it sounds given cashflow headwinds in both 2022 and 2023. RTX’s two aerospace segments demonstrated strong growth in 2023, helped by the last part of post-COVID recovery, but should continue solid growth; its defense segment has been significantly impacted by inflation, but mostly due to legacy fixed-price contracts that will largely disappear by the end of 2025. 2024 outlook indicates further year-on-year improvements in all segments. Efforts to resolve the “powder metal” issue have proceeded as planned, and outcomes have so far been in line or better than expectations.
With shares at $89.95, relative to 2023 adjusted financials, RTX have a P/E of 16.5x and a FCF Yield of 4.2%. Our forecasts indicate a total return of 57% (18.0% annualized) by 2026 year-end. Buy.
(For a recap of our investment case before “powder metal”, see our first Substack article on RTX in April 2023.)
RTX Free Cash Flow History & Targets
We see RTX’s cash earnings growing substantially in the next few years.
Management reported FCF of $5.5bn in 2023 (with “essentially zero” “powder metal” cash costs), and targets FCF of $7.5bn in 2025, or $9.0bn excluding $1.5bn of expected “powder metal” cash costs:
RTX Free Cash Flow - Historic & Targeted
