A Wells Fargo analyst has recently increased the company’s price target for RTX (RTX 0.98%) stock from $140 to $151, maintaining an “overweight” rating on the stock. This new target suggests a remarkable 31% upside potential compared to its current market price. However, market participants are left pondering whether such an ambitious price target is justified based on current performance and market conditions.
Understanding the Growth Potential of RTX Stock
The prevailing consensus on Wall Street anticipates that RTX will generate a staggering $8.4 billion in free cash flow (FCF) by 2026. Given its current market capitalization of approximately $153 billion, this projection translates to a price-to-FCF multiple of 18.2 times the expected 2026 FCF. The Wells Fargo analyst aligns this prediction with a similar analysis based on expected earnings growth, suggesting a robust future for the company.
As illustrated in the chart below, several of RTX’s aerospace and defense competitors are currently trading at significantly higher multiples. Achieving the price target of $151 would mean RTX is valued at just under 24 times its projected FCF for 2026, indicating a potential undervaluation relative to its peers.
RTX Price to Free Cash Flow data by YCharts.
The optimistic outlook for RTX is bolstered by a strong performance throughout the year, particularly as the company effectively navigated through challenges associated with GTF engine inspections. Additionally, thriving aftermarket sales have compensated for some weaknesses in original equipment (OE) sales, primarily attributed to disappointing aircraft production by Boeing and Airbus. Furthermore, RTX’s defense arm, Raytheon, has demonstrated improved adjusted operating profit margins across every reported quarter in 2024, which significantly enhances the company’s market position.
Image source: Getty Images.
Evaluating the Investment Viability of RTX Stock
Nonetheless, relying solely on relative valuation comparisons can be precarious, especially if the entire sector is perceived as overvalued. Presently, defense stock valuations appear stretched, raising concerns among investors. The industry is also grappling with challenges posed by the U.S. government’s push for fixed-price development contracts, which could impact profit margins. Additionally, there is no certainty that the current high levels of defense spending will persist in an industry traditionally viewed as a low single-digit growth sector.
If one maintains the perspective that RTX’s defense segment is likely to revert to a low single-digit growth trajectory, then the aforementioned valuations may not be sufficiently attractive to validate a $151 price target. Investors need to consider not only the growth potential but also the broader economic and regulatory landscape that could influence RTX’s future performance.
Wells Fargo is an advertising partner of Motley Fool Money. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends L3Harris Technologies. The Motley Fool recommends GE Aerospace, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.