RTX Corporation (RTX)

Total return at 5 years: 8.7%/year = 7.0% appreciation + 1.7% dividend. The target price ($262) is ex-dividend; the $18 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $197 · Multiples $226) exceeds the market price ($187).

Today — fairly valued: at $187 trades ~17.4% below its value discounted to today (~$226); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($262) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$142.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($187) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The implied growth (4.4%/year) is in line with our base case (5.5%/year) → the price is consistent with the projection.

That growth implies ~$12.7 bn of owner earnings in year 5 (vs ~$13.4 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/EBIT ajustado. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

The metric is adjusted operating income: to GAAP operating income is added the amortization of acquisition intangibles ($2,100M in 2025, $2,200M in 2024, $2,085M in 2023 — a stable series because the asset amortizes on a fixed schedule inherited from the Rockwell Collins and Raytheon purchases). It is an accounting charge with no cash outflow on a price already paid, and that is why the depreciation added back in owner earnings excludes it: adding it twice would double the same amount. The starting point of the path is not the trajectory in the file but current guidance: on 23 July 2026 the company raised its full-year adjusted sales target to $95,000-96,000M (organic growth of 8% to 9%), adjusted earnings per share to $7.10-7.25 and free cash flow to $8,500-8,750M. The first half grew 11.7%, so the guidance implies a second half of around 4%: the company itself anticipates the deceleration. The path starts at +7.0%, between that implication and the fact that guidance has already been raised twice in the fiscal year, and declines smoothly toward +5.3% by the fifth year, supported by a backlog of $289,000M — three times annual sales. Cash accumulates because buybacks are suspended (barely $50M in 2025) while the leverage inherited from the merger is reduced: accumulating cash and paying down debt have the same effect on equity value.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $262 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $187, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $262 in 5 years plus $18 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $226. Against the current market price ($187), the margin of safety is 17.4% (trades below the maximum → there is margin) and the total return at that price would be 8.7% annually.

• Entry multiple. The stock trades at 20× adjusted operating profit, above the 15-to-22-times range at which the exit is valued. Compression from there absorbs much of the business's growth.
• Exit multiple by segment. Collins at 20 times, Pratt & Whitney at 18, and Raytheon at 14, for a blend of approximately 17.8 times: within the sector range and below the 19 times a pure aftermarket franchise commands.
• Expected total return. The five-year total return is +9% annually, with +7% from price and +2% from dividend. The verdict is Fairly valued.
• Source of the discount. No current source is identifiable: the price already reflects two guidance raises. With no missing buyers and no forced sellers, the gap between perception and reality is absent.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (126%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital vs the 10% bar. Return on invested capital is 11.4%, above the bar, and understated because the denominator carries the goodwill and intangibles from the merger with Raytheon.
• Cash generation. Strong and growing: $11,407M of free cash flow (operating cash flow less capex) over the twelve months to Jun 30, 2026, with guidance of $8,500-8,750M for the fiscal year. Conversion from earnings is high, and the company directs it to debt paydown and the dividend.
• Quality of reported earnings. GAAP earnings understate the economics: acquisition-related intangible amortization subtracts about $2,100M a year with no cash outflow. The valuation metric excludes it, and owner earnings only add back physical depreciation (not intangible amortization, which was already added back in building adjusted EBIT), to avoid double-counting. The resulting CFROIC (~14.4%) exceeds book ROIC (~11.4%): earnings are more than backed by cash, with material growth capital expenditure (GTF capacity expansion) funded without drawing on working capital.
• Stock-based compensation. Insignificant: $540M over the trailing twelve months, 0.6% of sales and 6.4% of free cash flow. There is no distortion to correct in the metric.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The three segments and the backlog are the business's drivers. Pratt & Whitney's $1,455M loss in 2023 is the powder metal charge; the recovery to $2,596M in 2025 marks the starting point of the margin improvement that supports the projection. The dividend declared per fiscal year shows sustained growth; the current rate is $0.73 per quarter, raised 7.4% in June 2026.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Contracted growth. The $289,000M backlog covers three years of sales, and defense bookings rose from $51,000M (2023) to $61,000M (2025). Projected growth is not a trend extrapolation.
• Starting point of the growth path. It is anchored to current guidance, not to the filing's trend: adjusted sales of $95,000-96,000M with organic growth of 8% to 9%. Guidance implies a second half around 4% against a first half of 11.7%, so the deceleration is anticipated by the company itself.
• Reinvestment runway. Good but bounded by the sector's structure. Annual capital spending of $2,799M and program research and development sustain the position, but growth comes mainly from the installed base already sold, not from new markets.
• Capital cycle. Favorable. Capital is not entering the sector: the certification and consortium required for a new engine program act as a barrier, and consolidation over the past two decades left two suppliers in narrow-body engines.

• Relevant in 10 years / recurrence. Yes. The world's commercial fleet will keep flying and needing overhauls, and integrated air defense is a structural budget priority. The $289,000M backlog — three times annual sales — is the contracted evidence of that recurrence.
• Differentiated or commodity product. Differentiated and certified. A GTF engine or an SPY-6 radar has no approved substitute on its platform; the switching cost for the customer is prohibitive.
• Pricing power. Partial and asymmetric. High in the aftermarket, where the customer is locked in; limited in commercial original equipment versus Boeing and Airbus; and negative in fixed-price defense contracts, where the company absorbs cost inflation.
• Operating leverage. Favorable. In the second quarter of 2026 sales grew 14% and adjusted earnings per share grew 21%: the aftermarket rests on an already-installed cost base, so margin expands with volume.
• Behavior in a recession. Mixed by design. The defense half contributes budget stability, but commercial aerospace is cyclical: in the 2020 downturn, air traffic and deliveries collapsed and the aftermarket was deferred.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 1.6x
• !Interest coverage (EBIT / interest)7.2x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 126% of ROIC
• !Value creation (ROIC − 10% bar)+1pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.5x
• ✓Float / working capitalFrees up cash $1.8 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.6% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Net debt and coverage. Total debt of $32,087M against cash and short-term investments of $9,016M: $23,071M net, close to 1.8 times adjusted operating profit over the trailing twelve months. Net interest expense of $1,749M is covered more than seven times.
• Leverage trajectory. Deliberately improving: the buyback was suspended to pay down merger debt, and invested capital fell from $95,700M at the end of 2024 to $89,400M by mid-2026.
• Dividend coverage. Ample. The $3,722M in dividends paid over the twelve months to Jun 30, 2026 represent 33% of the $11,407M in free cash flow, leaving capacity to pay down debt and to resume the buyback.
• Contingency risk. Present but bounded. The powder metal issue has already been charged ($2,900M pre-tax in 2023), and fixed-price defense contracts produced a $600M charge in 2024; these are recurring sector risks, not a threat to solvency.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Alignment and track record. Christopher T. Calio rose through the engine business, the segment where the thesis is decided. Directors and executives as a group own less than 1%: he is a professional manager, not a founder with scale ownership.
• Capital allocation. Coherent and disciplined. He suspended the buyback to pay down merger debt, protected and raised the dividend, and divested non-core businesses instead of making acquisitions. Invested capital fell from $95,700M to $89,400M.
• Candor about mistakes. The powder metal quality issue was acknowledged with a $2,900M pre-tax charge and a published inspection plan, rather than being diluted across successive adjustments.

• It is not cheap: the price already reflects two guidance raises during the year. The source of opportunity that once existed — the discount from the 2023 powder metal quality issue — has already closed.
• What discrepancy remains is one of composition: the market values RTX as a defense conglomerate, when the commercial aftermarket of Collins and Pratt & Whitney generates two-thirds of sales and deserves the aerospace multiple, not that of a government contractor.
• GAAP operating profit is depressed by merger-related intangible amortization, which makes the published multiple look more expensive than it is on the underlying economics.

The honest conclusion is that no current source of discount is identifiable. With no missing buyers and no forced sellers, the analytical edge lies not in the price but in the composition: the commercial mix deserves a higher multiple than a defense contractor receives. That justifies the quality of the business, not a margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +2%/year (+10% total): the margin of safety protects the downside. The bull (+15%/year, +97% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Execution at Pratt & Whitney. Margin recovery from 7.9% is the model's single most sensitive assumption. A second quality episode like the powder metal issue would wipe it out and again ground customer fleets.
• Dependence on the defense budget. A third of sales depends on government decisions and the pace of approvals. The backlog offers no protection against a program cancellation.
• Fixed-price contracts. The company absorbs cost inflation, as shown by the $600M charge for the termination of a Raytheon contract in 2024.
• Customer concentration. Boeing and Airbus account for 16% of Collins' sales, and Airbus for 29% of Pratt & Whitney's. A slowdown in deliveries hits original equipment before the aftermarket offsets it.
• Price paid. At this multiple, the thesis has no room for disappointment: if growth reverts to the mid-single-digit range before the margin expands, multiple compression produces a negative return.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 11% above the 10% bar, but the margin is limited (+17%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a multiple/growth of 3.7 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 11% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 4%, in line with our 6%: perception and reality aligned.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -0%/yr, bull-scenario ceiling +13%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 4%, within what we project (6%) — the story squares with the numbers.