RTX Has a $340 Billion Backlog and Trades at 32 Times Earnings. Is It the Best Defense Stock to Buy Right Now?
The aerospace and defense company's backlog continues to grow, strengthening the long-term value case for the stock.
Raytheon Technologies (RTX) boasts a substantial $340 billion backlog, trading at 32 times earnings, and raises questions about its potential as the optimal defense stock to invest in. This analysis compares RTX to other defense and commercial aerospace companies, including Lockheed Martin (LMT) and GE Aerospace (GE). Rather than solely focusing on the current valuation of 32 times trailing earnings, this assessment takes into account future expectations, such as enterprise value (market cap plus net debt) over operating income.
Analyst consensus from S&P Global Market Intelligence suggests Lockheed Martin trades at 13.8 times operating income and GE Aerospace at 25.1 times this metric. Based on these valuations, RTX's defense and commercial aerospace segments are valued at 13.8 times and 25.1 times operating income, respectively. Assuming that 30% of RTX's revenue comes from defense and 70% from commercial aerospace, we can estimate the combined segment valuation at 21.7 times operating income.
Incorporating these valuations, along with Wall Street consensus for each segment's operating income in 2027, yields a theoretical market cap of $251.7 billion, or $186 per share. This valuation is in line with the current price of $192, indicating that RTX might be fairly valued compared to its peers. However, it is essential to note that RTX could be a more favorable investment than Lockheed Martin if one believes it represents a stronger business.
Nonetheless, RTX is more suitable for long-term, buy-and-hold investments rather than a stock that provides immediate value.
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