RTX Corp

RTX Corp (RTX) — Investment Memo

🐂 The Bull Case (Warren's voice)

• The Ultimate Toll-Bridge: RTX operates a classic "razor-and-blade" model on an unimaginable scale. Once a Pratt & Whitney engine is bolted onto an Airbus wing, or Collins avionics are integrated into a cockpit, the operator is locked into a 30-year high-margin service contract. You do not shop around for alternative parts when you are flying at 35,000 feet.
• A State-Sanctioned Oligopoly: The defense division (Raytheon) is fundamentally backed by the taxation power of the US Government. With global geopolitical tensions rising, their backlog is as secure as a US Treasury bond. The government cannot let them fail; they are a vital organ of national security.
• Hidden Cash Generation: While the GAAP financials are messy due to mergers and constant "restructuring," the core business generated $7.9B in free cash flow in 2025 against $6.7B in net income. When the capital-intensive remediation of the GTF engine program finally peaks, this business will throw off torrents of cash that cannot be easily inflated away.
• The Berkshire Entry Point: We would only find this business attractive if the market priced it like a troubled, cyclical industrial rather than a high-tech compounder. We want to buy the predictable, decades-long maintenance cash flows while paying absolutely nothing for the risky, capital-intensive engine-development side.

🐻 The Bear Case (Charlie inverts)

Munger's rule: "Show me where I'll die and I won't go there."

• Scenario 1: The Design-Debt Death Spiral: The 2023 GTF powder metal crisis is not an anomaly—it is the inevitable tax on extreme, high-precision engineering. In this business, a microscopic metallurgical flaw can ground entire global fleets, turning $7.9B of projected cash flow into a bottomless pit of remediation costs, litigation, and concession payments. If they suffer another systemic engineering failure on a major program, the liabilities will outpace their balance sheet's ability to cope, forcing a government-bailout style dilution.
• Scenario 2: The Open-Architecture Mandate: The Pentagon is increasingly frustrated by prime contractors using proprietary "lock-ins" to extract high margins on legacy hardware. If the Department of Defense successfully mandates open-architecture, modular procurement, Raytheon's switching costs evaporate. They will be relegated to low-margin hardware manufacturing, while software-defined defense startups capture the premium rents.
• Scenario 3: The Leverage-Margin Pincer: Carrying $41.1B in debt for a business with a declining 7.6% margin is a recipe for disaster in a higher-for-longer interest rate environment. Management is running faster on a treadmill—using debt to fund acquisitions and buybacks to mask a flat -1.0% EPS CAGR—while interest expenses quietly eat the remaining economic earnings.
• The Most Likely Killer: Over the next 5 to 10 years, the chronic erosion of returns on capital (ROE down from 18.3% to 10.3%) will continue. The business will simply drown in its own capital-intensive complexity, operating as a glorified, state-subsidized utility that benefits its management team and the FAA, but leaves zero crumbs for public shareholders.

💰 Valuation & Margin of Safety

The provided DCF projects an intrinsic value of $211.91 per share ($284.4B total valuation), assuming a 15.0% FCF growth rate. We must reject this growth assumption out of hand. A business that has grown revenue by 4.7% CAGR while EPS has shrunk cannot suddenly compound cash at 15% without taking on extreme operational risks or massive leverage.

Our adjusted intrinsic value is far lower, reflecting a more realistic 4% to 5% sustainable FCF growth rate.

• Our Estimate of Intrinsic Value: $120.00 per share (reflecting normalized capital expenditures and lower long-term growth).
• 25% Margin of Safety Entry: $90.00 per share.
• 50% Margin of Safety Entry: $60.00 per share (the price at which we sleep comfortably).
• Current Assessment: The stock is significantly overvalued. The market is pricing this business as if it were a capital-light software monopoly, completely ignoring the massive debt load, eroding margins, and the constant threat of catastrophic engineering liabilities.

Verdict: PASS

RTX Corp represents a classic "yield-trap" disguised as an wide-moat compounder. While their regulatory and switching-cost moats will keep the doors open for the next twenty years, the business consumes far too much capital and carries too much balance sheet risk to ever compound shareholder wealth effectively. We choose to stay in our circle of competence and keep our capital far away from this highly leveraged, complexity-addicted bureaucratic machine.