Investors and traders in the financial markets are closely watching RTX Corporation (NYSE:RTX), a prominent aerospace and defense company, as it prepares to release its third-quarter earnings report next week. There is a growing anticipation among market participants that this report could trigger a broader reevaluation of the company’s share price.
While investor sentiment has wavered in recent months due to engine issues caused by microscopic containments in powdered metal, as well as a lowered revenue guidance, there are several factors that make RTX Corporation an intriguing prospect for savvy investors.
The Different Businesses of RTX Corporation
RTX Corporation is comprised of three distinct business segments: Collins, which focuses on aerospace; Pratt & Whitney, which specializes in aircraft engine manufacturing; and Raytheon, a premier defense contractor. This diverse portfolio allows RTX Corporation to tap into various revenue streams and build resilience against industry-specific challenges.
The Impact of Engine Issues on RTX Corporation
In July, RTX Corporation detected a powder metal issue in its aircraft engines, which prompted a downward revision of its revenue forecast for FY 2023. The company has taken steps to address this issue, including repairs and accelerated engine inspections. However, these developments have contributed to negative sentiment towards RTX Corporation and even led to a new 1-year low for the company’s shares in October.
Despite these challenges, RTX Corporation’s new full-year outlook shows promising potential. The company is projected to generate $4.3 billion in free cash flow on approximately $68 billion in revenues, highlighting its ability to weather setbacks and maintain strong financial performance.
One avenue for RTX Corporation to enhance shareholder value is through its buyback program. The company has committed to repurchasing $3.0 billion of its shares, maximizing the value of its free cash flow. Given the discounted valuation resulting from the engine issue, these buybacks have the potential to drive significant returns for shareholders. With shares trading at just 13X forward earnings, this strategy makes even more sense.
Low Expectations Ahead of Q3’23 Earnings
Analysts have tempered expectations for RTX Corporation’s upcoming third-quarter earnings report. The market anticipates adjusted earnings per share of $1.22 on revenues of $18.2 billion. However, with 15 EPS downside revisions in the last 90 days, driven by concerns over the engine issue and lowered revenue guidance, there is room for RTX Corporation to surprise investors with positive progress in resolving these challenges.
Middle East Turmoil and RTX Corporation’s Compelling Valuation
Amid rising tensions in the Middle East, defense spending is expected to increase. RTX Corporation’s current valuation at 13.0X FY 2024 earnings presents a compelling opportunity for investors. In comparison, its rivals Lockheed Martin (LMT) and Northrop Grumman (NOC) are trading at significantly higher P/E ratios of 16.8X and 19.8X respectively. A fair value estimate of $84-89 suggests significant upside potential for RTX Corporation.
Risks and Conclusion
Although RTX Corporation has already accounted for the engine issue in its third-quarter earnings, there is still a potential for further downside if the issue persists and impacts the revised guidance for FY 2023. However, with a robust stock buyback plan and an already low valuation, much of the downside risk has already been factored in.
Overall, RTX Corporation represents an attractive investment opportunity. With its discounted valuation, progress in resolving the engine issue could serve as a catalyst for a significant revaluation of its shares. Combined with its diverse business segments and the potential for increased defense spending in the Middle East, RTX Corporation offers investors an opportunity to capitalize on an undervalued asset.