Revisiting RTX After the Iran Ceasefire: Defence Demand Hasn't Gone Anywhere

Here's what the market gets wrong every time a ceasefire or peace deal hits the tape: defence spending doesn't reverse. It ratchets.

NATO members committed to 2% GDP defence spending targets in 2014. By 2024, actual spending had only reached 1.8% on average. The Iran crisis, combined with ongoing Ukraine commitments and rising Indo-Pacific tensions, has pushed 15 NATO members above 2% for the first time. Germany alone increased its defence budget by 28% in 2025.

Ceasefires don't unwind procurement cycles. The F-35 programme doesn't get cancelled because Iran agreed to stop enrichment. Patriot missile battery orders don't get returned. The spending is committed over 5-10 year horizons, and the political dynamics in every major Western democracy favour more defence spending, not less.

We've been tracking defence budget cycles for over a decade, and the pattern is clear: spending increases are permanent, drawdowns are temporary.

Since our last analysis, RTX has reported Q4 results that exceeded expectations on both revenue and margins. Revenue hit $88.6 billion for the full year, up 10% from 2024. Operating income expanded to $8.9 billion, with the defence segment contributing an increasing share.

The backlog number is the one that matters most. At $217 billion, it represents nearly 2.5 years of revenue visibility — the highest in the company's history. New orders outpaced deliveries by 1.2x in the most recent quarter, meaning the backlog is still growing.

Free cash flow inflected sharply, jumping to $7.9 billion from $4.5 billion in 2024. Management attributed the improvement to improved working capital and the tail end of the Pratt & Whitney powder metal issue that had been dragging on FCF for two years.

At 29x forward earnings and a $266 billion market cap, RTX is priced at a premium to its historical range. The question is whether that premium is justified. With $217 billion in backlog and FCF nearly doubling, we think it is.

The defence thesis gets the headlines, but RTX's commercial aerospace business is equally compelling. Pratt & Whitney's GTF engine programme — despite the well-publicised powder metal recall — powers the Airbus A320neo, the most popular narrow-body aircraft in history. As the fleet returns to service and new deliveries accelerate, the aftermarket revenue stream from spare parts and maintenance will compound for the next 20 years.

Collins Aerospace, the avionics and interiors division, is benefiting from the same airline recovery. Interiors retrofit demand is running at record levels as airlines invest in premium cabin experiences.

Having two growth engines — defence and commercial — running simultaneously is unusual for an aerospace company. It's also why the current multiple, while elevated relative to history, may actually be warranted.