One Wall Street analyst believes RTX shares will reach $120. Is it a purchase?

A Bernstein analyst recently raised his price target on the company RTX (RTX 0.36%) stock to $120 from $115 and maintained a “market perform” rating. The analyst notes that aerospace and defense stocks have recently performed strongly, in line with the defense sector.

Further, on the commercial aerospace side, management’s assertion that teardowns and inspections for possible Geared Turbofan (GTF) defects are on track helps reduce inventory risk.

Are the target price and rating justified?

The price target is close to where the stock is trading now, and a market perform rating can be seen as a sell rating. After all, if a stock is only likely to perform in line with the market, then there is no point in taking on the risk inherent in the stock by buying it.

Bernstein’s vision makes perfect sense. As previously discussed, RTX’s valuation (trading at just over 20 times 2025 earnings) is starting to look a bit stretched. It also reflects the good news on the issue of GTF inspections on the commercial aerospace side.

However, RTX’s defense business deserves some circumspection. For example, the company cut its full-year free cash flow (FCF) expectations by $1 billion on its second-quarter earnings call due to legal issues at its Raytheon and Rockwell Collins divisions and a $500 million in cash flow termination of a fixed-price development project in defense. These issues highlight some of the industry-wide difficulties in the defense sector.

Image source: Getty Images.

Defense contractors continue to face margin challenges

There is no problem with demand in the medium term, not least because of fueling equipment sent to conflicts overseas and heightened geopolitical tensions fueling defense orders around the globe.

However, as Lockheed Martin management noted recently, its international defense sales tend to come with margins similar to those of the US government “because they are under the same contracting regime.” This is a problem because the US government appears to be getting better at putting pressure on defense contractor margins by insisting on fixed-price contracts.