RTX Secures German Sight Contract, But Valuation and Risks Loom Large

What happened

RTX's Raytheon ELCAN has been awarded a production contract to supply customized Specter DR weapon sights to the German Armed Forces, with orders exceeding 100,000 units amid surging European demand. This aligns with the DeepValue report's observation of rising NATO defense spending and RTX's role in modernization programs, such as Germany's soldier system upgrade. However, the report rates RTX as a 'POTENTIAL SELL' due to its elevated valuation at ~30x 2026E adjusted EPS and ~22x EV/EBITDA, which prices in aggressive growth expectations. Persistent risks include potential defense budget cuts, ongoing GTF powder metal remediation costs estimated at $1.1-1.3 billion, and tariff headwinds around $500 million annually that could erode margins. While this contract adds incremental backlog, it does not mitigate the fundamental overvaluation or execution challenges highlighted in the analysis.

Implication

The German sight order demonstrates RTX's competitive position in European defense markets, supporting near-term revenue visibility and backlog stability. Investors should note that RTX's stock has surged 58% over the past year, likely already reflecting such incremental wins, with valuation multiples indicating crowded optimism. The DeepValue report cautions that downside risks, such as GTF cost overruns or defense appropriations shortfalls, could trigger significant earnings cuts and multiple compression. Additionally, tariff pressures and fixed-price contract execution issues pose ongoing threats to profitability, limiting margin expansion potential. Therefore, this news is insufficient to alter the investment recommendation, and investors should await clearer signs of risk mitigation or valuation adjustment before considering entry.

Thesis delta

No significant shift in the investment thesis is warranted by this contract award. The core thesis of overvaluation amid execution and policy risks remains unchanged, as the order is incremental relative to RTX's $268 billion backlog and does not address key downside scenarios like GTF escalations or budget disappointments. Thus, the 'POTENTIAL SELL' rating with a conviction of 4.0 and attractive entry at $180 stays intact.