RTX's Coyote Demo Showcases Defense Innovation, but Overvaluation and Risks Persist

What happened

RTX's Raytheon unit successfully demonstrated its Coyote Block 3 Non-Kinetic variant in a U.S. Army test, touting its affordability and recoverability in defeating drone swarms. This aligns with the DeepValue report's emphasis on RTX's focus on expanding missile and air defense franchises as a key growth driver. However, the report critically notes that such technological successes are already priced into the stock at $203.50, which trades at ~30x 2026E EPS amid high leverage and commitments. Persistent risks, including potential defense budget cuts, GTF engine overruns, and tariff headwinds, threaten to compress margins and earnings. Thus, while the demo reinforces RTX's competitive edge, it does not materially alter the elevated execution bar or valuation concerns highlighted in the report.

Implication

For investors, this event validates RTX's ongoing innovation in counter-drone technology, potentially supporting future defense bookings and backlog growth. However, with the stock already reflecting high growth expectations at ~30x 2026E EPS, the upside from such news is limited without significant estimate revisions. The DeepValue report warns that RTX must outperform bullish assumptions to justify further gains, and this demo alone is unlikely to impact guidance or mitigate risks like GTF cash outflows. Investors should prioritize monitoring quarterly reports for defense order flow and tariff impacts, which are more critical to financial performance. Overall, this news reinforces existing strengths but does not change the recommendation for a lower entry price or risk reduction before considering new purchases.

Thesis delta

The Coyote demo supports the bull case for RTX's defense segment growth by showcasing technological proficiency, potentially enhancing contract wins. However, it does not alleviate the primary thesis concerns of valuation compression, ongoing GTF risks, or potential defense funding disappointments. Therefore, the 'POTENTIAL SELL' rating and emphasis on execution over narrative remain unchanged.