RTX Corporation (RTX -0.46%) reported terrific earnings last week, beating analyst targets on both the top and bottom lines Tuesday. Granted, its guidance for the rest of this year was a bit underwhelming, with forecast ranges for both sales and earnings falling short of the Wall Street consensus. Investment bank Susquehanna didn't let that scare it off from recommending the shares, however.
On Wednesday, Susquehanna analyst Christopher Rolland doubled down on its "positive" rating on RTX shares, and raised his price target on the stock by $9, to $119 a share.
Is RTX stock a buy?
What did Rolland like about RTX's report? The analyst highlighted RTX's record backlog number of $202 billion worth of contracts in hand, as well as the potential for this number to grow because of "compelling Commercial, Defense and Aftermarket revenue growth prospects [after] all three of its major business segments" showed strong growth in the quarter.
Rolland also noted "margin expansion potential across several of RTX's business segments" -- and that's a comment that needs further examination.
As it turns out, RTX margins declined in two key businesses in Q1, Collins Aerospace (airplane parts) and Pratt & Whitney (airplane engines), and only grew in one -- Raytheon, the company's core defense business.
Although historically high, that last one can probably be depended upon to remain solid as the trend of global rearmament marches forward. Meanwhile, margins at Collins and Pratt & Whitney (which suffered an embarrassing engine recall last year that it's still recovering from) both look historically low, and do have room for improvement.
In short, Rolland's probably right about the potential for margin expansion. The bigger question for investors is whether that potential is already priced into RTX shares. At 38 times trailing earnings, and with earnings expected to grow only about 11% annually over the next five years, it's hard to call RTX shares cheap.
It'll take a lot more than just one 20% earnings growth quarter to change that.
