It's been a tough year for defense and aerospace company RTX Corporation (RTX 0.79%) -- formerly known as Raytheon Technologies. The stock has not only trailed the S&P 500 over the past 12 months, but shares are down more than 10%.
The company incurred a $5.4 billion charge on revenue and a $2.9 billion hit to its operating profit in its third quarter due to a metal defect that impacted its aircraft engines. No shareholder likes to see billions of dollars go out the window, but this short-term impact may have created an opportunity for long-term investors.
A closer look at RTX's business shows a company poised to thrive, and the stock's valuation doesn't appropriately reflect that prospect. Here is why investors should consider buying RTX stock today.
1. Bookings are strong
RTX operates three primary business segments. Its Collins Aerospace segment designs and builds components and systems for aviation applications. Pratt & Whitney does the same for aircraft engines and auxiliary power systems. Lastly, the Raytheon segment focuses on defense and weapons systems, selling primarily to the U.S. government.
NYSE: RTX
Key Data Points
Despite the stock's underperformance, business is bumping for RTX right now. In defense and aerospace, companies sign long-term agreements that don't get billed all at once but over the contract's life. Investors can look at a company's backlog, its total amount of contracted business, to gauge whether it's growing.
As of Q3, RTX's backlog is a record $190 billion. Additionally, the company's backlog grew 19% year over year that quarter, so business is coming in faster than it's being completed and billed out. That means growth momentum is strong.
2. Shareholder returns are taking off
Companies routinely repurchase shares of their stock as a means of returning profits to shareholders. Buying back its stock will boost the company's earnings-per-share (EPS) and help support the share price. But if special circumstances arise, management may commit an accelerated share repurchase.
In late October, RTX's management team announced that it was pulling its repurchases forward because it believes that its stock is such a good value that it's more productive to buy its own shares than put that capital elsewhere.
Image source: RTX Corporation.
It's bold, but it emphasizes management's belief in the company's future, which can boost confidence for shareholders. RTX is returning billions of dollars to shareholders through repurchases and dividends. It's great when companies can (responsibly) put money in shareholders' pockets. Reinvested dividends and growing earnings will boost long-term investment returns.
3. Short-term woes create a buying opportunity
The stock has recouped some of its losses since October, but shares still look appetizing today. RTX stock trades at a forward P/E of 16. Meanwhile, RTX's strong backlog growth has investors optimistic for the future. They've steadily raised their consensus expectations for long-term annual earnings growth to over 10%.
I like using the PEG ratio to value stocks because it puts the P/E ratio up against earnings growth to show you how much you're paying for that growth. In RTX's case, the current PEG ratio of 1.6 isn't as cheap as months back, but it is still a very solid entry point for an investor looking to buy and hold the stock.
RTX EPS LT Growth Estimates data by YCharts
The risk in RTX stock is that costs related to the metal defect continue. Management has already recognized billions in charges, but expects that the defective engines will need to make another 600 to 700 visits to the repair shop through 2026. Hopefully, no future issues arise that would make future charges necessary. Given RTX's strong backlog and confidence shown by accelerating its repurchases, there seems to be more reward than risk in the stock at this point.
