RTX Corporation

Executive Summary

HOLD, High conviction. RTX rates a HOLD at High conviction. The business is stronger than it was a year ago, with FY2025 revenue of $88.6B, a raised FY2026 EPS guide of $7.10-$7.25, and a record $289B backlog, but the stock still trades at 33.66x trailing earnings against a peer average of 30.3x and sits near its 200-day average after a big rerating. The setup is not broken, it is simply less mispriced than the operating story suggests.

Investment Thesis

RTX is not being misread operationally. The company is executing. The debate is price. Since FY2025, the business has put up $88.6B of revenue, 13.7% growth, $5.02 of EPS, and operating margin improvement to 8.7% from 8.1%. Then on the latest call, management raised FY2026 sales to $95B-$96B, EPS to $7.10-$7.25, and free cash flow to $8.5B-$8.75B. That is not the profile of a struggling industrial. It is the profile of a company with real earnings torque from commercial aftermarket and defense.

The first thing the case depends on is Pratt normalization continuing. That does not require perfection. It requires the current trend to hold: PW1100 AOGs down 25% YTD, MRO output up more than 40%, and turnaround time better by 23%. If that continues, RTX should keep shifting toward higher-value service work and away from the worst of the disruption narrative. The second thing is Raytheon conversion. The demand signal is already there with $19.9B of bookings, a 2.42 book-to-bill, and munitions output more than doubled YTD. The open question is how quickly those bookings convert into profit and cash.

The reason this does not rate a BUY is valuation, not quality. At $194.00, the stock is only 14.5% below its 52-week high of $226.88 and basically sits on its 200-day average of $194.12. That is a very different setup from buying a temporarily broken stock 30% off the highs. The trailing 33.66x P/E is above the 30.3x peer average, while the quant engine's $200.89 target implies just 3.5% upside. Even the bullish pieces of the valuation blend are offset by the reality that comparable multiples are noisy and peer dispersion is wide.

The stock remains ownable for long-only quality portfolios because the moat is strengthening and the risk score is low at 30/100. It is just not an obvious incremental buy at this level. A better entry would come from either a lower price or evidence that FY2026 guidance is still too low, especially on free cash flow.

Key Metrics

Financial Strength

The balance sheet reads adequate, not pristine. Leverage at 2.60x debt/EBITDA and 0.59 debt/equity is manageable for a business with long-cycle backlog and defense exposure, and the 1.01 current ratio suggests liquidity is tight but serviceable rather than stressed. The more important trend is cash generation: trailing $3.6B of FCF is modest for a $260.8B market cap company, but management's guide to $8.5B-$8.75B implies a major step-up if inventory and working capital normalize. Margin direction is also favorable, with FY2025 operating margin up to 8.7% and Q2 EBITDA margin at 17.2%, though investors should still demand proof that higher earnings translate into sustainably better cash conversion.

Competitive Position

RTX's moat comes from certified aerospace platforms, a very large installed engine and avionics base, and long-cycle defense programs that are hard to displace once qualified. That moat is durable because aftermarket service, spares, and mission-critical defense systems carry high switching costs and regulatory barriers, and the $289B backlog gives unusual visibility. The key question is not whether the moat exists, but how much of today's GTF disruption converts into future high-margin service capture versus near-term remediation cost.

Management & Guidance

Current guidance is constructive and, more importantly, backed by recent delivery. Management said, "So based on our first half execution and the demand strength we're seeing across our commercial and defense markets, we're raising our full year outlook for adjusted sales, EPS and free cash flow." The new ranges are $95B-$96B of adjusted sales, 8%-9% organic growth, $7.10-$7.25 of adjusted EPS, and $8.5B-$8.75B of free cash flow. That guidance looks credible because RTX has beaten EPS estimates in 8 straight quarters, organic sales were +16% in Q2, and the backlog reached $289B. The watch item is that management also flagged 2H growth slowing to around 5% and kept the FCF guide's top end unchanged because of inventory timing, so credibility is strong but not unlimited.

Segment Analysis

• Commercial aerospace and aftermarket (N/A): The main growth engine now, supported by low-double-digit FY2026 commercial aftermarket guidance, PW1100 AOGs down 25% YTD, and MRO output up more than 40%.
• Defense (N/A): Growth remains strong, with high-single-digit FY2026 defense sales guidance, $19.9B of Raytheon bookings, and a 2.42 book-to-bill.
• Geography (N/A): Geographic revenue split was not provided, but management highlighted added domestic and European munitions capacity and stronger international advances at Raytheon.

Capital Allocation

Capital allocation looks disciplined but not especially aggressive. In the latest deep-dive data, RTX generated $3.6B of FCF, spent $0.6B on capex, paid $1.0B in dividends, and did $0.0B of buybacks, which signals that management is prioritizing operational recovery and balance-sheet flexibility over financial engineering. The planned sale of Blue Canyon Technologies for $620M is consistent with focusing capital on core aerospace and defense capabilities.

Management Execution & Track Record

Management has earned credibility. On the 2024 Q3 call, RTX guided FY2024 adjusted sales to $79.25B-$79.75B, adjusted EPS to $5.50-$5.58, and free cash flow to about $4.7B, while saying it expected another year of organic growth, margin expansion, and significant cash generation in 2025. Since then, FY2025 revenue reached $88.6B with 13.7% growth, EPS reached $5.02 with 39.3% growth, and operating margin improved to 8.7% from 8.1%, showing that the growth and margin direction was broadly right even if cash remained a work in progress. The recent record is stronger still: RTX has beaten street EPS in 8 straight quarters, including +20.6%, +17.9%, and +13.9% surprises in the last four reported quarters, and on the 2026 Q2 call it again raised full-year sales, EPS, and FCF. The strategy has not changed materially, commercial aftermarket and defense remain the core engines, but execution has improved, especially at Pratt where MRO output rose more than 40% and AOGs fell 25% YTD.

Positioning & Flows

Ownership is crowded and institutional, with the top holders controlling 75.2% and insiders at 0.0%, so the stock is more likely to trade on earnings revisions than on a change in sponsorship. Short interest is low at 0.99% of shares, or 12.3M shares with 2.5 days-to-cover, which removes squeeze support but also suggests little outright bearish pressure. Near-term options positioning is modestly fragile because the ≤45DTE GEX regime is negative and the zero-gamma level is $200.46, slightly above spot, which can amplify moves around earnings rather than damp them.

Bull Case

• Operating momentum is real: FY2025 revenue grew 13.7% to $88.6B, EPS grew 39.3% to $5.02, and operating margin improved to 8.7% from 8.1%.
• Management is delivering raised guidance, not just beating lowered bars: FY2026 sales were lifted by $2.5B to $95B-$96B, EPS by $0.35-$0.40 to $7.10-$7.25, and free cash flow to $8.5B-$8.75B.
• The Pratt recovery is tangible: PW1100 AOGs are down 25% YTD, MRO output is up more than 40%, and turnaround time improved 23%, which supports higher aftermarket mix and better cash conversion.
• Defense demand is accelerating, not flattening: Raytheon bookings reached $19.9B with a 2.42 book-to-bill, and management said critical munitions output has more than doubled YTD.

Bear Case

• The stock is paying up for that progress: 33.66x trailing P/E is above the 30.3x peer average, while peer dispersion is wide at 4.4x, which lowers confidence in upside from relative multiple arguments.
• Free cash flow has improved in guidance, but trailing cash generation still looks thin relative to size: FCF was $3.6B in FY2025 on $88.6B of revenue, and management left the top end of FY2026 FCF unchanged at $8.75B because of working-capital inventory build.
• 2H growth is set to slow materially: management expects revenue growth to decelerate to about 5% at the midpoint because Pratt and Raytheon face tougher comps.
• Commercial OE still has friction: Pratt commercial OE sales were down 8% in Q2 on large-engine mix and material allocation to MRO, which caps near-term margin upside even with strong aftermarket demand.

Valuation & Price Target

Engine price target $200.89 (+3.5% vs current), High confidence.

• P/E Multiple: $180.32 (28% weight)
• PEG (growth-adjusted): $157.55 (20% weight)
• P/S Multiple: $243.56 (20% weight)
• Quality-adjusted: $222.93 (20% weight)
• DCF: $213.22 (12% weight)

This rating aligns with the quantitative baseline of HOLD, and the reason is simple: the business deserves better sentiment than it had two years ago, but the stock does not offer enough valuation headroom to justify a stronger call. The engine's $200.89 target implies only 3.5% upside from $194.00, even after incorporating stronger methods like DCF at $213.22 and quality-adjusted at $222.93. The counterweight is the richer trailing valuation at 33.66x P/E against a 30.3x peer average and wide peer dispersion of 4.4x, which weakens the argument that peer multiples alone support a higher target. Sell-side consensus sits at Strong Buy from 7 firms, but that is low-signal context here; the more important fact is that the stock already reflects much of the guidance improvement.

Risk Assessment

Risk score 30/100 (Low). The biggest risk to a more bullish stance is valuation compression, because a 33.66x trailing P/E leaves little room for error if 2H revenue growth slows to roughly 5% and Pratt OE remains pressured.

The Bottom Line

RTX rates a HOLD with High conviction. The company is better, the backlog is stronger, and forward EPS power is clearly rising, but the stock already reflects much of that repair. At $194.00, investors are paying a full price for an execution story that still needs to prove out in cash flow. A move to BUY would require either a more attractive entry point or evidence that FY2026 earnings and free cash flow are again too low. A move to SELL would require a break in Pratt recovery, weaker defense conversion, or a meaningful miss to the raised guide.