1 Dividend Defense Stock Is Way Undervalued

As war erupts in the Middle East, investors have turned their attention to defense stocks, and RTX (NYSE:RTX) in particular.

The knee-jerk reaction that happens time and again when conflict erupts is to buy Lockheed Martin (NYSE:LMT), RTX (formerly Raytheon) and Boeing (NYSE:BA), but are they smart purchases for the long-term or simply quick trading opportunities?

We jumped down the rabbit hole to figure out whether RTX can sustain a move to the upside.

Top Line Growth Accelerating

It’s perhaps a little surprising to discover that RTX share price has declined by 27% this year given that revenue growth has been accelerating. Over the past 5 quarters, RTX posted top line year-over-year growth of 2.7%, 4.6%, 6.2%, 9.5%, and 12.3% respectively.

That is precisely the type of financial prowess that usually attracts investors but perhaps a jolt was needed to kickstart a bullish trend, and now we see that happening following an escalation of the Israel-Palestine conflict.

The first metric that stands out is the price-to-earnings ratio, which sits at 18.3x. For comparison, the average P/E multiple for RTX peers is 35x, suggesting that RTX is on sale at this time.

Another attractive attribute is the company’s dividend. RTX currently pays a dividend yield of 3.38% and has a 53 year consecutive streak of paying shareholders quarterly dividends. That is the kind of consistency and stability any investor with a longer term horizon would find attractive.

So it’s got a few things in its favor but is it a steal at the current price level?

Is RTX Stock Undervalued?

RTX is trading at a low P/E multiple relative to earnings growth suggesting it is on sale.

It is also undervalued according to analysts, who have a consensus $90.43 price target on the stock, implying 23.2% upside from current price levels.

A discounted cash flow analysis further confirms that RTX stock is undervalued at this time and has a $103 fair value target, suggesting as much as 45% upside opportunity.

When you combine accelerating revenue growth, a low earnings multiple relative to forecasted EPS growth, elevated analysts ratings, and severe undervaluation based on a discounted cash flow analysis, you arrive at a compelling investment opportunity.

Yet, with RTX, there is even more than meets the eye.

RTX Is Much More Than a Defense Contractor

Beyond the flagship brand of defense contractor, RTX is the umbrella corporation overseeing a variety of subsidiaries, including Raytheon Missiles & Defense, Raytheon Intelligence & Space, Collins Aerospace, and Pratt & Whitney. The combination of these provides the company with a diverse stream of revenues that makes it resilient to the economics of any single one.

And at a time when two sectors set to benefit from an escalation of the Israel Palestine conflict are defense and cybersecurity, it doesn’t hurt RTX that it has a business unit specifically aimed at addressing cyber warfare, called the  Intelligence & Space division. That makes RTX not just a hardware play but a software one too.

RTX is also much more than a domestic play on US military budgets. About 1 in every 3 dollars it generates in revenues stems from overseas contracts, not least with NATO countries and other allies with whom it has contracts. That ensures the company is somewhat protected from a contraction in military budgets (which have continued to expand).

An often overlooked aspect of RTX too is its deep treasure trove of intellectual property. Under its hood sits proprietary IP on everything from radar technology to missile systems.

Few companies can compete with RTX, and those who are sufficiently well-resourced to do so are faced with a high barrier to entry. Another way of saying that is RTX has a wide moat that can’t be encroached upon easily.

What Could Go Wrong for RTX Investors?

With so many factors coming together to support an investment, what are the pitfalls of buying RTX shares?

For one, RTX is heavily dependent on a network of suppliers in the US and abroad to provide parts. Everything from health scares to trade restrictions and natural disasters have the potential to disrupt its production and cause expenses to rocket higher.

At a time when war escalates, there is also a risk that investors buy a stock with short-term bullish sentiment that quickly peters out.

RTX has been in a pretty severe downtrend this year, after all, so even a pop in early October isn’t enough to turn the tide fully from a chart perspective. The moving averages are all still trending lower. With that said, it has been oversold recently according to the relative strength index oscillator.

Further, RTX’s dependency on aerospace and government contracts are concentrated, meaning a reduction in military budgets or simply the cyclical nature of commercial aerospace could create conditions for its share price to decline or plateau.

Nonetheless, the conditions appear fertile now for RTX share price to blossom, and it seems the quicksand it fell into a year ago might be a thing of the past.

Wrap-Up

RTX share price received a jolt that sparked it higher following a sharp escalation in conflict in the Middle East. Prior to that event, the share price had been in a severe decline, falling by almost 30% year-to-date. 

The fundamentals of the company have remained resilient in spite of the share price tumble with revenue growth accelerating and the 53 year dividend streak continuing uninterrupted. 

If anything, the fall in RTX stock has provided an attractive opportunity for investors who are willing to look out over the horizon and see brighter days ahead when Wall Street recognizes the low P/E multiple relative to future earnings estimates.

Both analysts and a discounted cash flow analysis confirm that RTX does appear undervalued at this time, with an upside potential ranging from 23% to 45% on the cards for investors, respectively.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.