Trump's Threat to Cut Contracts Heightens RTX's Political and Valuation Risks

What happened

President Trump has threatened to cut Raytheon's government contracts over stock buybacks, criticizing the company's slow response to U.S. military demands. The DeepValue report notes RTX is already grappling with the GTF engine crisis, volatile free cash flow, and a high valuation of 36x P/E, warranting a 'POTENTIAL SELL' stance. This political threat directly materializes the defense-budget risk highlighted in the report, potentially jeopardizing RTX's $218B backlog, which includes significant government contracts. With 40% of sales tied to the U.S. government, any contract cuts could strain finances further amid ongoing legal settlements and GTF remediation costs. This development underscores the stock's overvaluation and limited margin of safety, adding urgency to the existing caution.

Implication

The threat to government contracts could reduce RTX's revenue stability, given its heavy reliance on U.S. defense spending. This may lead to lower bookings and backlog, undermining growth prospects and cash flow generation. Combined with ongoing GTF costs and legal issues, it might force RTX to curb shareholder returns like buybacks, exacerbating financial pressure. The high valuation leaves little room for error, increasing the likelihood of a de-rating if contract losses occur. Investors must closely monitor RTX's response and administrative actions, as this signals a riskier environment for defense contractors.

Thesis delta

The news introduces a concrete, high-impact political risk that was previously a generalized threat in the DeepValue report. This strengthens the 'POTENTIAL SELL' thesis by adding a near-term catalyst that could accelerate contract cuts and financial strain, making the overvalued stock even more vulnerable to de-rating.