A look at the one-year, three-year, and five-year performance of RTX (RTX +0.73%) compared to the S&P 500 index and its peer, GE Aerospace (GE 1.21%), reveals a lot about the stock and its investment proposition. In general, it's good news for RTX investors, but there are nuances here that might prompt you to think more deeply about the stock.
RTX pleases investors
It's been a market-busting period for the stock, with significant outperformance over the last year and five years for RTX. However, there are a couple of things to note from the data:
- RTX underperforms its peer, GE Aerospace, over every period.
- RTX only slightly outperformed the S&P 500 index over the last three years.
|
Return |
1 Year |
3 Year |
5 Year |
|---|---|---|---|
|
RTX |
49% |
77% |
137% |
|
GE Aerospace |
65% |
457% |
398% |
|
S&P 500 |
13% |
74% |
86% |
Data source: YCharts.
What happened in 2023?
The last point is easy to explain, and perhaps is less significant for the investment case. Back on the company's second-quarter 2023 earnings call, management disclosed a potential contamination in powder coating used at Pratt & Whitney, which meant engines primarily on the Airbus A320 neo family of aircraft would have to be removed for inspection. The issue affected RTX's earnings and cash flow and partly contributed to the significant underperformance relative to GE Aerospace.
For reference, RTX's Pratt & Whitney and GE Aerospace's joint venture, CFM International, compete with rival engines on the Airbus A320 net family. CFM makes the sole engine on the Boeing 737 MAX.
Why RTX underperformed GE Aerospace
Both companies have benefited from the recovery in commercial aircraft departures since the lockdowns and travel restrictions ended. While it hasn't been smooth sailing for restoring engine production due to ongoing supply chain challenges, both companies have substantial aftermarket businesses that benefit from increased flight departures and flight hours, notably on older engines, as Boeing and Airbus have struggled to meet their own expectations for aircraft production.
Image source: Getty Images.
However, the key difference is that RTX's far larger defense exposure, mainly in its Raytheon segment, has led it to suffer a common problem among defense contractors -- namely, the difficulty of delivering on fixed-price development defense programs. The Raytheon segment reported a 9% increase in operating profit in 2024 compared to 2023 as it increased from $2.379 billion to $2.594 billion.
However, the 2024 figure was flattered by a $375 million gain on the sale of a business. Moreover, the company reported a $575 million charge related to the termination of a fixed-price development program with a foreign government.
This could be dismissed as a one-off item. Still, the problem is that fellow defense contractors Boeing and Lockheed Martin have suffered similar issues, resulting in multibillion-dollar charges and delayed programs.
It's not a coincidence, and the defense industry may be entering a period of lower margins as governments negotiate more aggressively over increasingly complex, costly-to-produce technology.
Image source: Getty Images.
Did RTX investors miss out?
In my view, the answer has to be no, as the stock outperformed the index. Still, investors would have generated better returns by avoiding investing in defense contractors in favor of companies with heavier exposure to commercial aerospace, like GE Aerospace.
