RTX Reports Strong 2025 Results but Confronts Unchanged Policy and Valuation Risks

What happened

RTX announced robust 2025 sales, EPS, and free cash flow, with a positive 2026 outlook, highlighting operational strength and backlog conversion. However, the DeepValue report emphasizes a critical January 2026 executive order targeting dividends and buybacks for defense contractors, which could severely restrict RTX's capital returns. The stock trades at a premium valuation of ~40x P/E, pricing in aggressive free cash flow growth of $7-7.5 billion for 2025-2026, despite ongoing challenges like Powder Metal Matter remediation costs and rising labor expenses. Political scrutiny and potential enforcement of payout restrictions add regulatory uncertainty that could compress multiples from elevated levels. Thus, while the news is favorable, underlying risks from policy and execution remain unaddressed, maintaining a cautious investment stance.

Implication

The 2025 performance reinforces RTX's growth narrative but does not alleviate the direct risk from the executive order on capital returns, which could undermine the premium valuation. Management must balance delivering on free cash flow targets with navigating political pressures, with any misstep likely triggering multiple compression. Upcoming catalysts, such as the 2025 10-K and formal response to the executive order, will be critical for assessing the sustainability of capital returns and growth. Given the high valuation and crowded positioning, the risk-reward profile remains unfavorable, supporting a trim-or-hold approach rather than new buying. Long-term investors should monitor for policy clarity and FCF consistency before considering increased exposure.

Thesis delta

The strong 2025 results align with the DeepValue report's base scenario of mid-single-digit revenue growth and gradual FCF improvement, confirming operational execution. However, the thesis does not shift meaningfully, as the key bear case driver—enforcement of dividend and buyback restrictions under the executive order—remains a live threat that could derail capital returns. Investors should await management's explicit guidance on policy compliance and FCF delivery in 2026 before reassessing the investment call from 'POTENTIAL SELL' to a more constructive stance.