In this piece, I evaluated two defense stocks, RTX Corp. (NYSE:RTX) and Lockheed Martin (NYSE:LMT), using TipRanks’ comparison tool to determine which is the better buy. Both are major defense contractors for the U.S. government.
Formerly known as Raytheon Technologies, RTX Corp. is one of the world’s largest defense and aerospace manufacturers by market capitalization and revenue. Meanwhile, Lockheed Martin is a defense, aerospace, weapons, information security, and technology company.
RTX stock has plunged by 26% year-to-date, with the bulk of that decline coming in the last three months, and it’s also down 11% over the last year. Lockheed Martin is down 7.9% year-to-date but up 9% over the last year.
With such a dramatic difference in their longer-term performances, it’s no surprise that Lockheed Martin shares rallied twice as much as RTX’s stock on Monday. Lockheed Martin stock soared 8% versus RTX’s 4% gain in response to the surprise weekend invasion in Israel.
For comparison, the S&P Aerospace & Defense Select Industry ETF (NYSEARCA:XAR) bounced 4% on Monday — in line with RTX’s gain and demonstrating Lockheed Martin’s sizable outperformance versus most of its peers.
To gauge RTX’s and Lockheed Martin’s valuations, we’ll compare their price-to-earnings (P/E) ratios. For comparison, the U.S. defense and aerospace industry is trading at a P/E of 22.4, lower than its three-year average of 28.1.
RTX Corp (NYSE:RTX)
At a P/E of 18.5, RTX is trading at a steep discount to its industry. It’s also trading close to its 52-week low of $68.56. Thus, a bullish view may be appropriate in the near term, although this could change in the event of a sizable increase in its stock price or a significant worsening of the engine problems it reported.
In September, RTX announced it was taking a $3 billion charge related to those engine problems, which it said would ground hundreds of Airbus (OTC:EADSF) jets owned by airlines at any one time. The problems affect the Geared Turbofan engine series made by Pratt & Whitney, which RTX acquired in 2020 via a merger.
RTX reported that a rare metal defect could cause some engine components to crack and called for accelerated inspections of 200 engines by mid-September. RTX also reported that it would have to pull 600 to 700 engines from its Airbus A320neo jets for extended quality inspections between now and 2026. Initially, the company had expected those repairs to last up to 60 days, but now they are projected to last up to 300 days per engine.
Aside from those issues, RTX has enjoyed steady year-over-year revenue growth. Its sales rose from $56.6 billion in 2020 to $64.4 billion in 2021 and $67.1 billion in 2022.
Unfortunately, RTX stock is up only 3% over the last five years, although it does offer an attractive dividend yield of 3.2%, making it a potential dividend play, especially considering that it could continue its bounce off its 52-week low in the near term.
What is the Price Target for RTX Stock?
RTX Corp has a Moderate Buy consensus rating based on seven Buys, 10 Holds, and two Sell ratings assigned over the last three months. At $88.29, the average RTX stock price target implies upside potential of 20.96%.
Lockheed Martin (NYSE:LMT)
At a P/E of 14.6, Lockheed Martin is trading at a steep discount to its industry and RTX. Adding the company’s exposure to the conflict in Israel and its healthy, stable net income margins suggests a bullish view may be appropriate.
Over the long term, Lockheed Martin has displayed strong execution time and time again. In fact, the company’s stock is up 50% over the last five years, making it a solid buy-and-hold play for the long term. The company’s healthy 2.9% dividend yield makes it an even more attractive long-term holding.
Lockheed Martin also has a long history of share repurchases, making it even more shareholder friendly. The company repurchased $6.8 billion worth of shares over the last 12 months and $7.9 billion in 2022.
Additionally, Lockheed Martin has very solid net income margins that have ranged from 8.7% in 2022 to 10.5% for the last 12 months and 10.4% for 2019 and 2020. On the other hand, RTX’s net income margins have ranged from -6.2% in 2020 to 6% in 2021 and 8% for the last 12 months.
Finally, Lockheed Martin and RTX both offer exposure to the war in Israel that broke out over the weekend when Hamas terrorists struck the country, leaving over 1,000 dead with a steadily rising death toll. However, Lockheed Martin has much deeper exposure to the Israel conflict because it is entirely a defense stock, while RTX also has a commercial aircraft division that leaves it exposed to weakness in consumer air travel.
What is the Price Target for LMT Stock?
Lockheed Martin has a Hold consensus rating based on two Buys, 10 Holds, and one Sell rating assigned over the last three months. At $497.27, the average Lockheed Martin stock price target implies upside potential of 13.91%.
Conclusion: Bullish on RTX and LMT
Although RTX and Lockheed Martin both receive bullish ratings, Lockheed is the clear winner of this pairing. RTX is trading around its 52-week low, even after gaining 4% following the turmoil that broke out in Israel over the weekend. Thus, more upside seems likely in the near term. However, the bull case for RTX could disappear soon, either due to a steady increase in its stock price or due to continuing engine problems.
On the other hand, Lockheed Martin has shown itself to be a steady-Eddie gainer over the last five years, with its stock price chugging ever higher on the back of steady net income margins and shareholder-friendly practices. Thus, while Lockheed Martin is the clear winner, a secondary but short-term bull case could be made for RTX stock since it is trading around its 52-week low.
