Germany's $3.5B Missile Deal Reinforces RTX's Defense Backlog but Highlights Execution Risks

What happened

Germany has requested approval to buy 750 air defense missiles from RTX for $3.5 billion, a sizable order that underscores ongoing NATO rearmament efforts. This aligns with RTX's substantial backlog of approximately $218 billion and remaining performance obligations of $236 billion, where defense programs like AMRAAM and Patriot are key growth drivers. However, the unusually high purchase price per missile may indicate supply chain inefficiencies or premium pricing, potentially masking underlying cost pressures from components like rocket motors. Critical execution risks from the DeepValue report, such as Pratt & Whitney GTF remediation and defense production bottlenecks, could delay profit conversion from this backlog. While the deal bolsters revenue visibility, it does not immediately address near-term valuation concerns at a P/E of ~36x or operational hurdles.

Implication

The $3.5 billion missile sale adds to RTX's massive backlog, reinforcing multi-year revenue certainty in air defense amid NATO demand. Investors should critically assess profit margins, as high prices may be eroded by supply chain costs or future estimate-at-completion adjustments on long-term contracts. RTX's valuation remains elevated at a P/E of ~36x, and this deal alone is unlikely to boost near-term earnings without improved backlog conversion rates. Key monitoring items like GTF fleet health and defense program scaling become even more crucial, as delays could offset the benefits of such contracts. Overall, this news underscores the balanced risk/reward profile, emphasizing the need for sustained cash generation and execution before any thesis upgrade.

Thesis delta

The German missile deal confirms RTX's exposure to defense tailwinds, a positive noted in the DeepValue report. However, it does not materially alter the near-term execution risks around GTF remediation and supply chain bottlenecks, nor does it improve the full valuation. Thus, the HOLD thesis remains unchanged, with continued focus on converting backlog into earnings and cash.