Tomahawks, Sidewinders, Patriot missile systems - built by Raytheon. Engines powering the aircraft we fly on - built and maintained by Pratt & Whitney. Flight control computers and aircraft interiors - built by Collins. RTX is a diversified aerospace and defence contractor to Airbus, Boeing, the US Government, airlines and leasing companies globally. To put that into context, Boeing has a seven year $500B order backlog, there are 14126 Airbus aircraft in operation and the US Department of Defence Fiscal Year 2025 budget is $850B.
CHOOSING THE RIGHT STOCK
When considering an investment in any company, the Investment Thesis has to be considered within the context of three areas.
Best-In-Class - RTX evolved from a merger between Raytheon and United Technologies (UTX) in 2020. The company operates under three segments
Raytheon - is a provider of offensive and defensive technologies across land, air, sea and space. Offerings span smart weapons, air defence systems, space based systems and advanced radars and sensors.
Pratt & Whitney - is a leading engine manufacturer and part of a Global duopoly with General Electric. P&W engines power both wide and narrow-body aircraft, military fighters and bombers, business jets and regional aircraft. Airbus is the largest commercial customer.
Collins Aerospace - A leading supplier of advanced aerospace products - flight control computers, navigation and communication systems and aircraft interiors - defence products and aftermarket services. Boeing and Airbus are the largest commercial customers and Collins participates in the aircraft development process. With a global reach, Collins’ customers include airlines, aircraft manufacturers, maintenance providers and defence contractors.
Strong Secular trend - The Industrial sector began to change society in the 1800’s and has accelerated societal progress and prosperity. It is the foundation of manufacturing and infrastructure, facilitates global trade and commerce, drives technological innovation and contributes to economic development, National Security and defence.
Strong Economic Environment - As of January 2025, the US economy is one of the strongest globally. The US Federal Reserve, to date, has procured a ‘soft economic landing’, inflation has declined, interest rates are declining at a measured pace with expectations to continue, unemployment levels are low and the US Gross Domestic Product (GDP) continues to grow with the expectations of a possible recession pushed back.
INVESTMENT THESIS
The RTX investment Thesis is founded on four pillars
1. Long Term Contracts - Contracts provide a strong underlying foundation to the revenue stream. Airbus has an order backlog of approximately 7,000 aircraft, with 14,000 aircraft currently in service. Boeing has an order backlog of 6000 aircraft with over 10,000 in service. The US Department of Defence Fiscal Year 2025 budget is $850B. The scale and scope of these customers provide long term contracts for the procurement of aircraft parts, aftermarket service and military defence systems.
2. Diversified Aerospace and Defence Company - Diversification provides stability in the event of uncertainties or when any one segment falls out of favour while also providing the opportunity to capitalize on exposure to areas of growth. RTX participates in a number of diversified subindustries within the Industrial sector through its three operational segments. A strong example of the power of this diversification would be the Defence budget uncertainties through the pandemic which were offset by the development of the Airbus 320NEO and the subsequent high demand for commercial aircraft engines.
3. Aerospace and Military Procurement Cycle - The 2025 Trump administration, through Defence Secretary Peter Hagseth, has an agenda to rebuild the American Military with the most advanced systems. In 2025, Airlines are reporting record profits by focusing on new route capabilities and cost reduction opportunities through the procurement of next generation aircraft from Boeing and Airbus which have longer ranges, use less fuel, have lower environmental impact and more efficient operating costs. Increased utilization requires increased maintenance. As interest rates decline, financing becomes more affordable potentially accelerating a cycle which has been significantly supply constrained from 2020 through 2024.
4. Undervalued Late Stage Business Cycle Laggard - The resolution of a number of issues provides RTX the opportunity to outperform. The Industrial sector is cyclical. The ‘Business Cycle’ is comprised of four stages. Peak, Contraction,Trough, Expansion. Through 2024, the US economy remained largely in the late stage of the expansion cycle with many industrial sector stock prices accelerating through the early stages. RTX and the defence sector have been laggards to this cycle. RTX specifically was impacted in 2024 by 1. Defence Budget uncertainty 2. Pratt & Whitney engine recall which cost the company $2.9B in compensation to customers 3. Supply chain constraints.
RISKS AND THREATS
There are risks and threats to an investment in RTX
1. RTX’s primary competition includes Lockheed Martin, Honeywell, Northrup Grumman, Boeing (Defence), General Electric (engines) and General Dynamics. These competitors are more polarized on one or a few products or services which could be viewed as a threat - concentration can lead to technological advances and first mover advantage. However, RTX makes significant investments in Research and Development to maintain a competitive position in innovation in each of its three segments.
2. Industrials generally underperform the S&P500 largely due to the rapid expansion in technology stocks.
3. Geopolitics and conflict - Conflicts usually provide short term opportunity to defence contractors as governments increase military spending. However, longer term geopolitical conflicts can have negative effects in the form of shifting alliances, redistribution of defence contracts, supply chain constraints, trade barriers, export control and regulation.
4. Economic - a shift in the business cycle to the ‘contraction’ phase would possibly cause large institutional investors to reduce exposure to the cyclical Industrial sector.
That does that mean at stockmarketHQ
Diversification is one of the best risk mitigation strategies in Portfolio Management. RTX epitomizes this concept through
1. Exposure to the cyclical industrial sector with Defence and Aerospace exposure
2. A diversified business strategy through its three operating segments Raytheon, Pratt & Whitney, and Collins.
RTX is a Best-in-Class company which has been an industrial sector laggard throughout 2024 due to the uncertainties of Government budget funding, engine recall and supply constraints. These issues have largely been resolved and when combined with a number of positive catalysts there will be a tailwind that will work towards driving the share price to outperformance. These catalysts include;
- $850B Department of Defence 2025 Budget
- Rebuild of US military and National Security policies.
- Declining interest rate environment
- Increasing profitability of airlines
- Strong secular trend in transportation and defence
- Increased production rates by the largest customers Boeing and Airbus
Contracts provide stability to the revenue stream. The United States spends more on defence than the next nine countries combined. This provides the opportunity for lucrative military contracts across a broad spectrum of land, air, sea, and space. Boeing and Airbus require a stable supply chain to meet production and delivery obligations, necessitating long term contracts.
In July, 2024 Boeing released its Commercial Market Outlook which projected the global aircraft fleet to almost double over the next twenty years from about 26,750 jets in 2023 to 50,170 by 2043. Half of the aircraft deliveries will be fleet replacement and half will grow airlines fleets. Those aircraft are going to require engines, flight control computers, interiors and maintenance services - RTX's diversified product mix.
There are a number of strong industrial sector themes - construction for infrastructure, electrical components and power generation for AI data centres, and aerospace and defence. RTX is not polarized towards one or a few products like competitors, and it is the company which provides the best all around balanced exposure to the aerospace and defence theme.
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