RTX Corp (RTX) stock intrinsic value fair value estimate & owner earnings analysis

RTX is three businesses under one roof: Collins Aerospace (avionics, cabin, power and actuation systems sold to Airbus, Boeing and airlines), Pratt & Whitney (the GTF engine on the Airbus A320neo family, the V2500, the F135 engine for the F-35, and Pratt & Whitney Canada's small engines), and Raytheon (Patriot, Standard Missile, AMRAAM, radars and other defense systems). The company in its current form dates from April 2020, when United Technologies spun off Otis and Carrier and merged with Raytheon, so only 2021 onward describes the business as it exists today. About 53% of 2025 sales were in the United States, much of that to the U.S. government, and 47% abroad. Order backlog reached $268 billion at the end of 2025 ($161 billion commercial, $107 billion defense), up from $218 billion a year earlier, roughly three years of sales. How we measured earnings. We start from operating cash flow, strip out swings in working capital, and charge stock compensation (including about $0.3-0.6 billion a year of 401(k) matching paid in company stock) and the capital spending needed to keep the business where it is. We treat Pratt & Whitney's yearly payments for program shares and other intangible assets (about $0.3-0.75 billion a year) as part of that spending, because they recur every year. About $2.1 billion a year of amortization of intangibles bought with Raytheon and Rockwell Collins is added back as a sunk acquisition cost; the decay of those assets is carried by the company's own research spending, which is already charged against earnings. Interest is added back so the business is valued before its lenders, and the debt is subtracted at the end. On that basis cash earnings before interest were $3.89 a share in 2021, $3.24 in 2022, $2.82 in 2023, $4.93 in 2024 and $7.22 in 2025. 2021-2022 were held down by the slow return of air travel after the 2020 shutdown. 2023 carries the full $2.9 billion charge for the GTF powder-metal defect (customer compensation for grounded A320neo aircraft, of which about $0.7 billion was still to be paid at the end of 2025), and 2024 carries about $1.3 billion of charges for resolving government legal matters and a terminated Raytheon contract. We take the middle of 2023-2025, $4.93 a share (about $6.7 billion), as the starting level, leaving those charges in as a fair allowance for the quality and legal problems a business this size keeps meeting. 2025's $7.22 was helped slightly (about $0.27 a share) by a tax refund from the 2025 change allowing research costs to be deducted immediately, which will also flatter 2026 before fading. Base case ($103 a share). Cash earnings rose 46% in 2025; we assume year one at $5.90, a level the business has already exceeded, supported by the first half of 2026 (operating cash flow of $5.4 billion against $1.8 billion a year earlier). Years two and three grow 6% as the contracted backlog is delivered, and years four to ten grow 3%, well below the roughly 8% a year at which sales grew from 2021 to 2025, carried by the growing fleet of installed engines and aircraft systems that needs spare parts and overhauls. After year ten we hold earnings flat rather than assume growth: Pratt & Whitney and Raytheon have each operated for about a century, and engines delivered today earn aftermarket revenue for decades. We do not credit new programs, margin gains or share gains. The business is worth about $174 billion; it owes about $34 billion net (roughly $37.4 billion of borrowings less about $5.3 billion of surplus cash, plus about $4 billion for the minority partners' share of jointly owned engine programs and the $0.7 billion of remaining GTF compensation, less about $3 billion because most of the debt is fixed at a 4.5% average rate with an average life of about 12 years). That leaves about $103 a share. Bear case ($47 a share). Earnings stay at the $4.93 starting level, then a commercial aviation collapse like the 2020 shutdown hits in years two to five: the commercial side (which we take as about 55% of earnings, in line with its share of sales and backlog) loses 90% of its cash in the worst year and takes three more years to recover, while defense holds flat, so cash earnings fall to about $2.49 a share. In year six a second engine quality problem costs as much as the 2023 powder-metal charge, and the company's own annual report warns that other Pratt & Whitney engine models contain affected powder metal. Growth is 1% afterward, and after year ten earnings shrink 1% a year as the GTF loses ground to its rival on the A320neo. The business is worth about $97 billion, it owes about $34 billion, leaving about $47 a share. Even at the bottom, cash earnings are about twice the $1.75 billion annual interest bill, and debt due through 2028 is modest ($3.4 billion in 2026, $2.9 billion in 2027, $3.5 billion in 2028), so the debt can be carried. Bull case ($163 a share). Year one reflects the $7.00 a share already earned in 2025 (excluding the tax refund), the backlog drives 7% growth for three years, the installed-engine aftermarket and the defense order book (up from $93 billion to $107 billion during 2025) support 4% through year ten, and the growing GTF fleet, whose aftermarket work peaks well after year ten, supports 1% growth beyond. The business is worth about $256 billion, less about $34 billion owed, leaving about $163 a share. The margin-of-safety price. We are moderately confident of the earnings level: the defense half rests on a $107 billion defense backlog, much of it with the U.S. government, but the commercial half has shown it can lose most of its cash in a year (2020), and engine quality problems have cost billions (2023). The worst plausible outcome is both at once, an air-travel shock arriving while the GTF fleet needs another fix. The business survives that: debt is long-dated and fixed-rate, and defense cash alone covers interest. What we are most likely to be wrong about is the starting level; if the business never earns above $4.93 a share before growth, the shares are worth about $82. The price assumes a three-to-four-year holding period, with a dividend of about $2.70 a share a year. From $55 the dividend plus a move toward our base value implies well over 20% a year, and even the $82 outcome would come close. In the bear case the shares would be worth less than $55, a roughly one-in-ten outcome in which the dividend continues and the business survives intact; above $55, too many of the likely outcomes fall short of 20%. The margin-of-safety price is $55. Our previous estimate was prepared on a different basis and is not comparable.