Five Reasons RTX Is the Most Undervalued Defence Stock

RTX's defence backlog exceeds $200 billion. Patriot missile systems alone account for $30 billion+ in unfilled orders, with demand accelerating after the system's performance in Ukraine and the Middle East demonstrated its capability in live combat. Every conflict this decade has been a live advertisement for RTX's products.

The backlog provides revenue visibility that few industrial companies can match. At current delivery rates, it represents over four years of defence revenue. New orders continue to exceed deliveries, meaning the backlog is growing, not shrinking. For capital allocators, this is the closest thing to contractual revenue outside of subscription software.

The GTF engine powder metal defect was a genuine crisis. Roughly 3,000 engines required accelerated inspection, grounding aircraft and disrupting airlines globally. RTX took a $3.5 billion charge and the stock dropped 25%.

That was the bottom. The inspection programme is now over 70% complete. Airlines are planning around the known timeline rather than being surprised by it. And here's the part the market hasn't fully absorbed: every engine that comes back for inspection also generates a service event that RTX bills for. The crisis is converting into aftermarket revenue. We've seen this pattern before in aerospace — recalls and inspection mandates are short-term cost events that generate long-term service income.

Collins Aerospace, RTX's avionics and interiors business, generates $27 billion in annual revenue with operating margins above 16%. It supplies cockpit systems, communication equipment, seats, lighting, and environmental controls to virtually every commercial aircraft and many military platforms.

The beauty of Collins is that it's a multi-decade annuity. Aircraft interiors require refurbishment every 8-12 years. Avionics systems require upgrades every 5-7 years. Collins' installed base generates recurring revenue that's less cyclical than new aircraft production and less headline-grabbing than missile orders, but equally predictable.

As a standalone business, Collins would command a 15-18x EBITDA multiple — similar to TransDigm or HEICO. Inside RTX, the market assigns it roughly 12x. That gap represents $20-30 billion in unrealised value.

NATO members have collectively committed to spending 2% of GDP on defence — up from the 1.3-1.5% most were actually spending before 2022. This represents hundreds of billions in incremental defence procurement over the next decade, and RTX's product portfolio is precisely aligned with the systems NATO needs: air defence (Patriot, NASAMS), precision-guided munitions (Tomahawk, StormShadow), and surveillance systems.

The European defence procurement cycle is still in its early stages. Germany's €100 billion special fund, Poland's aggressive modernisation, and the Baltic states' expansion all represent multi-year order pipelines. RTX's European revenue could double over the next five years without winning a single new programme — purely from executing on existing commitments.

RTX returned $8 billion to shareholders in 2025 through dividends and buybacks. Management has guided for $36-40 billion in total shareholder returns from 2025-2027. At the current market cap of $274 billion, that represents 13-15% of the company's value returned in three years.

The dividend yield sits at 2.1% — modest, but the payout ratio is conservative at 35% of free cash flow. As the GTF remediation costs roll off and margins normalise toward 14-15%, free cash flow could reach $12-14 billion annually. That supports both dividend growth and aggressive buybacks without leveraging the balance sheet.