A Wells Fargo analyst recently raised the company's price target for RTX (RTX 0.98%) stock to $151 from a previous target of $140 and maintained an "overweight" rating on the stock. As such, it represents a 31% premium to the current price, but is the new target warranted?
The case for RTX stock
The Wall Street consensus has RTX generating $8.4 billion in free cash flow (FCF) in 2026, which, based on the current market cap of $153 billion, would put RTX on a price-to-FCF multiple of 18.2 times 2026 FCF -- the Wells Fargo analyst makes a similar argument based on earnings. As you can see below, some of its aerospace and defense peers trade on significantly higher multiples right now, and hitting the price target of $151 would put RTX on a price-to-FCF multiple of just under 24 times FCF in 2026.
RTX Price to Free Cash Flow data by YCharts
The bullish case is supported by an excellent year for RTX as it largely overcame the GTF engine inspections issue, and excellent aftermarket sales helped overcome weakness in original equipment (OE) sales due to disappointing airplane production at Boeing and Airbus. In addition, RTX's defense business Raytheon improved adjusted operating profit margins in every reported quarter of 2024 so far.
Image source: Getty Images.
Is RTX stock a buy?
That said, relative valuation arguments are dangerous if the whole sector is overvalued and defense stock valuations look stretched. The industry remains challenged by the U.S. government's attempt to force fixed-price development programs onto defense companies, and there's no guarantee that the current elevated spending levels will continue in an industry traditionally seen as a low single-digit grower.
If you believe there's nothing fundamental to change the view that RTX's defense business will return to a low single-digit growth rate, then the above valuations are not cheap enough to justify a $151 price target.
