Since September 2020, the S&P 500 has delivered a total return of 82.9%. But one standout stock has nearly doubled the market - over the past five years, RTX has surged 162% to $158.72 per share. Its momentum hasn’t stopped as it’s also gained 18.6% in the last six months thanks to its solid quarterly results, beating the S&P by 8.1%.
Is now the time to buy RTX, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is RTX Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about RTX. Here are three reasons why RTX doesn't excite us and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect RTX’s revenue to rise by 4.7%, a deceleration versus its 8.3% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
RTX’s EPS grew at an unimpressive 4.8% compounded annual growth rate over the last five years, lower than its 8.3% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
RTX historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.7%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
RTX isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 25.7× forward P/E (or $158.72 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Like More Than RTX
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