A Year That Beat Every Line of Its Own Guide, and a 2026 That Guides to 6.5% EPS Growth: Downgrading RTX to Hold as the Stock Clears Our Target

Results vs. Consensus

Consensus providers bracketed a narrow range entering the print: $1.47 adjusted EPS on roughly $22.69B of revenue at two of the three providers we checked, $1.46 on $22.74B at the third. On the lower estimate the EPS beat widens to 5.9% and the revenue beat narrows to 6.6%. The more informative benchmark for RTX's fourth quarter, however, is not consensus but the company's own standing guide, because nine months of the year were already reported. The October range of $6.10 to $6.20 less nine-month adjusted EPS of $4.74 implied a fourth quarter of $1.36 to $1.46, which is almost exactly where the Street sat. The $1.55 print therefore cleared both.

Year-over-Year Comparison

Sequential Comparison

The sequential decline in adjusted EPS is entirely a tax artefact and should not be read as deceleration. Sales grew 7.8% and adjusted segment profit grew 2.9%, while the adjusted effective tax rate rose 720 basis points because roughly $0.12 of Q3's result came from legal-entity reorganization benefits that management said would not repeat. Holding the Q3 tax rate constant, this quarter's adjusted EPS would have been about $1.70, flat sequentially. The company told investors in October to expect exactly this, and the step-up in the Q4 rate was the specific reason the October guide implied a fourth-quarter earnings decline.

Assessment: Revenue

Fourteen percent organic growth is the fastest quarter RTX printed in 2025 and it closed a year that accelerated in each half: 10% organic through nine months, 11% for the full year. What makes the fourth quarter more than a comparison effect is that the acceleration came from the segment with the most operating leverage left to harvest. Pratt grew commercial original equipment 28%, commercial aftermarket 21% and military 30%, all at once, on higher F135 production and heavier large-commercial-engine shop-visit content. Raytheon's 7% looks modest until set against the prior-year quarter, whose sales carried a benefit from the restart of contracts with a Middle East customer that sits inside the comparison base, so the underlying land-and-air-defense growth rate is higher than the reported one. On the input side, the supply of material into the segment recorded its eleventh consecutive quarter of growth. The one line a bull should not over-read is Collins' 3% reported: divestitures of the actuation and Simmonds Precision businesses subtracted $428M, and Collins grew 8% organically. The same arithmetic will suppress Collins' reported growth through 2026.

Assessment: Margins

The streak ending matters less than why it ended, and the honest answer is that it ended on a technicality plus a mix effect that is the mechanical price of the growth investors want. A quarter in which the lowest-margin segment grows 25% and the two higher-margin segments grow 3% and 7% will dilute the blended margin whatever management does, and Pratt's incremental dollar is the one with the twenty-year aftermarket tail attached. That said, two things in the margin line do deserve to be carried forward rather than explained away. Collins' adjusted margin fell 21 basis points on 8% organic growth, with the release naming divestitures and higher tariffs; underneath, the aftermarket mix rotated the wrong way, with provisioning accelerating from 10% to 24% and the higher-margin mods and upgrades line decelerating from 17% to 7%. And Raytheon's 11.6% is 60 basis points below the 12.2% it printed in Q3, exactly the shift the CFO said would come as international Patriot mix normalized. The October note said 12.2% should not be treated as the new floor. It was not.

Assessment: EPS and cash

For the first time in our coverage the cash line is the strongest part of the print rather than the weakest. Free cash flow of $3,195M beat the $2.3 to $2.8B the October guide implied, lifted the full year to $7,940M against a range that had been defended at $7.0 to $7.5B through three consecutive prints, and did so while absorbing roughly $1.0B of powder-metal compensation and roughly $600M of tariff-related impacts. Add the powder metal back and 2025 generated $8.94B, above the $8.0 to $8.5B normalized baseline the CFO offered in October as the right way to look through the payments. Operating cash flow of $10,567M grew 47.6% against sales growth of 9.7%, which is the working-capital normalization the bear case said would be delayed another year. On the earnings line, the useful number for modelling 2026 is not the $1.55 but the $6.29 full year, and roughly $0.12 of that came from non-repeating tax items, so a clean base sits near $6.17. Measured off that base, the 2026 guide midpoint of $6.70 is 8.6% growth rather than the 6.5% the headline arithmetic gives.

Segment Performance

Segment sales sum exactly to the consolidated line after the $651M elimination, and the three segments' adjusted operating profit sums exactly to the $2,884M total. Consolidated adjusted operating profit of $2,967M sits above the segment total because it adds the FAS/CAS pension adjustment of $183M and the $32M elimination profit, then nets off $132M of adjusted corporate expense.

Channel Mix

Raytheon is wholly defense and is therefore not broken out by channel; its 7% organic growth is the segment result shown above. Collins' defense line grew only 2%, and management named a difficult comparison as the reason: the year-ago quarter grew 13%. Inside Collins' 13% aftermarket growth the sub-channels were provisioning up 24%, parts and repair up 11%, and mods and upgrades up 7%. That ordering is the inverse of last quarter, when mods and upgrades led at 17% and provisioning trailed at 10%.

Collins Aerospace

Collins produced 8% organic growth, a $16M increase in adjusted operating profit, and a 21 basis point margin decline. The release attributes the gap to two identified items, divestitures completed during the year and higher tariffs across the business, and the divestiture effect is visible in the organic bridge: acquisitions and divestitures subtracted $428M of Collins revenue in the quarter. For the full year, Collins generated $30,196M of adjusted sales and $4,893M of adjusted operating profit, 9% organic growth with 30 basis points of margin expansion. The CFO sized the 2025 tariff drag at Collins at 90 basis points, which puts underlying margin at 17.1%.

"So let me start with '25. You're right. We had about 30 basis points of margin expansion there. Would tell you that from a tariff perspective, that was a a 90 basis point drag. So if you were to add that back you know, we saw Collins, I'll call it, organic margins at 17.1%, which was really, really nice to see." — Neil Mitchill, Chief Financial Officer

The forward setup is the best of the three segments. Collins now carries about $105 billion of out-of-warranty installed content, up from more than $100 billion at Q3, which is the structural engine behind aftermarket revenue regardless of the original-equipment cycle. For 2026 management guides Collins sales up mid single digits on an adjusted basis and high single digits organically, with commercial original equipment up approximately 10%, aftermarket up high single digits, and defense up mid single digits on the F-35 and other mission-systems platforms. Adjusted operating profit is guided to grow $425M to $525M, including an approximately $50M headwind from the completed divestitures, and the CFO put the resulting margin expansion at 80 basis points at the midpoint. Tariffs turn into a roughly $75M tailwind year over year, though 2026 absorbs an extra quarter of tariff expense that will depress the first quarter specifically.

Assessment: Collins is now the segment carrying consolidated margin expansion, and its drivers are self-help rather than mix: back-office digitization, footprint consolidation and pricing, which management says has several years of benefit left. That is more durable than a favourable mix quarter and less visible from the outside, which is the trade. The watch item is the aftermarket composition rather than its rate: provisioning tracks new aircraft deliveries and carries less margin than mods and upgrades, and this quarter the two swapped places. If that persists, Collins' 80 basis points will be harder to reach than the guide implies.

Pratt & Whitney

Pratt was the quarter's growth engine and its margin drag at the same time: 25% organic growth, 8% adjusted profit growth, and 130 basis points of adjusted margin decline to 8.2%. All three channels grew, with commercial original equipment up 28% on higher volume and favourable mix in large commercial engines, commercial aftermarket up 21% on heavier content, and military up 30% on F135 production and sustainment across the F135 and F100. The margin decline has four named causes: commercial aftermarket mix, higher tariffs, higher selling and administrative expense, and the absence of a prior-year insurance recovery of approximately $70M. That last item alone is worth roughly 90 basis points against the year-ago base; adjusting for it, Pratt's margin declined about 38 basis points rather than 130. For the full year Pratt delivered $32,916M of adjusted sales and $2,725M of adjusted operating profit, 17% organic growth with 20 basis points of margin expansion.

"On the GTF fleet management plan, our financial and technical outlooks remain on track. As planned, PW1100 AOGs declined in the fourth quarter, and we expect this trend to continue as we move throughout the year. MRO output was up 39% in the fourth quarter, up 26% for the full year, even as heavier shop visits increased 40% in 2025." — Chris Calio, Chairman and Chief Executive Officer

The geared turbofan recovery is genuinely progressing and it also missed the specific number management committed to in October. Full-year PW1100 maintenance, repair and overhaul output grew 26% against the roughly 30% the CEO confirmed on the October call, even though the fourth quarter itself grew 39% with a 16% reduction in turnaround time. The mitigating fact is real: heavier shop visits rose 40% in 2025, so output per visit absorbed capacity that unit growth would otherwise have shown. For 2026 management guides output growth of "in line with what we saw in 2025", which is roughly 26% rather than a re-attempt at 30%, and expects sales up mid single digits with adjusted operating profit up $225M to $325M. Two new network shops were added, with the UAE's Sinad Group and Spain's ITP Aero.

Assessment: Pratt is delivering the recovery and under-delivering the promise, which is a distinction worth holding. Aircraft on ground fell more than 20% from the 2025 highs, the strongest directional statement management has made on the metric, and the GTF Advantage moved from certification to production cut-in. But the one commitment from October that was specific enough to score came in four points light, and management neither flagged the shortfall nor was asked about it. We would treat the 2026 output guide of "in line with what we saw in 2025" as the company resetting to a pace it can hold rather than as conservatism.

Raytheon

Raytheon delivered the cleanest margin quarter of the three on the smallest growth: 7% organic sales growth, 22% adjusted profit growth, and 140 basis points of adjusted margin expansion to 11.6%. Growth came from land and air defense systems including Patriot and GEM-T, plus naval programs including Evolved SeaSparrow Missile and Tomahawk, partly offset by the absence of the prior-year Middle East contract restart benefit. Bookings were $10.3B for a quarterly book-to-bill of 1.35 and a record segment backlog of $75B, with a full-year book-to-bill of 1.43 on roughly $40B of awards. International content is now 47% of Raytheon's backlog, up three points from 2024. Fourth-quarter awards included $1.2B to supply Spain with additional Patriot systems, $1.2B for Tamir missile production to be executed in the recently completed Camden, Arkansas facility, more than $900M of classified bookings and approximately $600M for NASAMS. For the full year Raytheon generated $28,043M of adjusted sales and $3,231M of adjusted operating profit, 6% organic growth with 130 basis points of margin expansion, including $157M of improved net productivity.

"We've seen about $160 million year over year improvement for each of the last two years. Now that may tail off a little bit. We'll see probably another 25 or so million dollars year over year improvement. But we're in the we're in the zone where we're seeing positive productivity coming out of the the Raytheon business..." — Neil Mitchill, Chief Financial Officer

That disclosure is the most consequential sentence on the call for anyone underwriting Raytheon's margin. Net productivity was the evidence we cited in October for treating the segment's margin gain as structural rather than mix-driven, and it is guided to fall from about $160M of annual improvement to about $25M. The segment's 2026 profit guide of $200M to $300M against sales guided up mid to high single digits implies an adjusted margin somewhere between 11.4% and 11.8%, against 11.5% delivered in 2025. The CFO framed it more warmly, saying the outlook puts the segment "pretty close to the 12% range" and that there is no reason margins cannot go north of 12%, and noted that 85% of Raytheon's 2026 sales already sit in backlog.

Assessment: Raytheon's order book and its margin trajectory are now telling different stories, and the market is listening to the first one. A record $75B backlog at 47% international with an $11.4 to $11.8% margin guide is a segment consolidating a large gain, not one compounding it. We would model Raytheon in the 11.5 to 12% band through 2026 and look for the productivity line to reaccelerate as the new Tucson, Andover and Huntsville capacity comes online before crediting anything above 12%. The demand case is unchanged and the margin case has paused.

Key KPIs

Key Topics & Management Commentary

Overall Management Tone: Management was assured and unusually forward-leaning on capacity, spending most of the prepared remarks on the physical business rather than the financial one and volunteering operational detail that was not required to make the case. The posture tightened in exactly two places: the fourth-quarter margin line, which was narrated segment by segment without any consolidated acknowledgement that the expansion streak had ended, and capital returns, where the answer to a direct question about political pressure named the dividend and investment and did not mention repurchases at all. Compared with October, when the company was rebuilding credibility after a mid-year guidance cut, this was a call delivered from a position of strength and spent almost entirely on the ramp ahead rather than the year just closed.

1. A Year That Finished Above Every Line of Its Own Guide

The single most useful fact about 2025 is not any individual print but where the year landed against the range the company set in October, with nine months already reported and only one quarter left to guess at. RTX cleared the top end on all four metrics: adjusted sales of $88.603B against $86.5 to $87.0B, organic growth of 11% against 8 to 9%, adjusted EPS of $6.29 against $6.10 to $6.20, and free cash flow of $7.940B against $7.0 to $7.5B. Set that against a year in which the company also cut its EPS guidance once, in July, on tariffs and newly enacted tax legislation, and the full-year shape is a company that absorbed two external shocks and still finished above a range it had already raised twice.

"On the orders front, we ended 2025 with a full year book to bill of 1.56, resulting in another record backlog of $268 billion, up 23% year over year with roughly $161 billion of commercial orders, and $107 billion of defense awards. On the commercial side of the business, our backlog is up 29% year over year driven by growing aircraft production rates, and resilient passenger air travel." — Chris Calio, Chairman and Chief Executive Officer

The order book tells the same story with a longer horizon. A 1.56 full-year book-to-bill on $88.6B of sales implies roughly $138B of orders and a $50B backlog build, which reconciles exactly to the move from roughly $218B at the end of 2024 to $268B now. Commercial orders and commitments in the year included 1,500 GTF engines and more than 2,400 Pratt Canada engines. On the defense side the full-year book-to-bill was 1.31.

Assessment: This is as clean an execution year as a company of this size produces, and it validates the operating-system argument we credited at initiation. It is also, for a stock that has already re-rated on that argument, the part of the story the market has now seen. The question this print raises is not whether RTX can execute but what the next four years of execution are worth at 30 times earnings.

2. The 2026 Outlook Is a Deliberate Step Down in the Growth Rate

The first guide for 2026 is for adjusted sales of $92.0 to $93.0B, organic growth of 5 to 6%, adjusted EPS of $6.60 to $6.80, and free cash flow of $8.25 to $8.75B. Against 2025 that is reported sales growth of 3.8 to 5.0%, adjusted EPS growth of 4.9 to 8.1%, and free cash flow growth of 3.9 to 10.2%. Organic growth halves, from 11% to the 5 to 6% band. The channel detail shows the deceleration is broad: at the RTX level and adjusted for divestitures, commercial original equipment and defense are both guided up mid single digits and commercial aftermarket up high single digits, against 2025 actuals of 10%, 8% and 18% respectively.

"For 2026, we expect adjusted sales to be between $92 billion and $93 billion with 5% to 6% organic growth year over year. Increased volume, along with pricing and our continued focus on productivity and our cost structure, will support another year of consolidated segment margin expansion." — Chris Calio, Chairman and Chief Executive Officer

Some of the step-down is arithmetic rather than demand. The 2025 base is 11% higher, the divestitures completed during 2025 suppress reported growth through 2026, and the commercial aftermarket comparison is against an 18% year. Management framed none of it as softening: global revenue passenger kilometres are expected to grow around 5% again, original-equipment production rates increase again on the A320neo, 737 MAX and 787, and the defense environment is described in terms of NATO allies moving from roughly 2% of GDP toward approximately 3.5% by 2035 with Asia Pacific and Middle East budgets growing 3 to 4% annually over the next five years.

Assessment: The guide is almost certainly conservative in the way RTX's guides have been conservative all year, and the right central case is a number above the top end rather than at the midpoint. But conservatism does not close the gap on its own. Even at the top of the range, 2026 grows adjusted EPS 8.1%, which for a stock at 30 times that year's earnings means the return has to come from a beat, not from the guide.

3. Where the $1.55 Went: Nine Percent Segment Profit, One Percent EPS

The fourth quarter is the clearest illustration this year of how much of RTX's operating growth reaches the per-share line. Adjusted segment operating profit grew 8.8%. Adjusted operating profit grew 4.0% because adjusted corporate expense swung from $4M to $132M. Adjusted pre-tax income grew 5.2%, helped by a $51M reduction in adjusted net interest expense. Adjusted net income grew 1.9% because the adjusted effective tax rate rose from 21.9% to 23.9%. Adjusted EPS grew 0.6% because diluted shares rose 0.9%.

"Adjusted earnings per share of $1.55 was up 1% from prior year as strong segment operating profit growth was partially offset by expected higher corporate expenses and a higher effective tax rate in the quarter." — Neil Mitchill, Chief Financial Officer

The load-bearing word in that sentence is "expected", and the company earned it. The October guide implied a fourth quarter of $1.36 to $1.46, a year-over-year decline, and management said at the time that the Q4 tax rate would step up and that roughly $0.12 of the third quarter's result would not repeat. Both happened. The company then beat the implied range by $0.09 anyway. On a constant prior-year tax rate, adjusted EPS would have been about $1.59, up 3.5%.

Assessment: Nothing here is a demand signal and nothing here was hidden, which is why the market looked through it. It does, however, set the pattern for 2026, where the same below-the-line arithmetic recurs in larger size. An investor who models RTX from segment profit and stops there will be wrong by several points a year.

4. The EPS Walk: $0.59 of Operating Growth, $0.41 Delivered

Management gave a full bridge from the $6.29 of 2025 to the $6.70 midpoint of 2026, and the bridge reconciles to the cent. Segment operating profit contributes approximately $0.59, already net of a roughly $0.03 headwind from the Collins divestitures. Lower average debt adds about $0.06 of interest tailwind. Against that, lower pension income takes approximately $0.13, driven primarily by the de-risking actions including the fourth-quarter annuity buy-out; a higher share count takes about $0.05; and all other items, largely higher minority interest associated with joint ventures, take about $0.06.

"For the year, the most significant driver will be segment operating profit, which will drive approximately $0.59 of EPS growth at the midpoint of our outlook range. Included in this segment growth is a headwind of roughly $0.03 associated with the divestitures we completed last year at Collins." — Neil Mitchill, Chief Financial Officer

The net is $0.41, or 6.5% on the 2025 base. Put differently, the below-the-line and share-count items absorb 31% of the operating growth. The aggregated segment profit guides corroborate the operating half: Collins up $425M to $525M, Pratt up $225M to $325M and Raytheon up $200M to $300M sum to $850M to $1,150M, a midpoint of roughly $1.0B on 2025 adjusted segment operating profit of $10,849M, or 9.2%.

Assessment: This is the single most important table in the release for valuation purposes, and it is not in the release. A business growing segment profit 9% and per-share earnings 6.5% is compounding book value faster than it is compounding the number investors capitalize, and the wedge is structural rather than one-off: the pension de-risking is permanent, the joint-venture minority interest grows with the joint ventures, and the share count rises every year that buybacks stay at zero. Only the share-count item would close if repurchases resumed.

5. Free Cash Flow Finally Cleared the Bar, and Cleared Management's Own Normalization Too

The October note said the cash line was the one part of the thesis the company had not proven, that the implied fourth quarter of $2.3 to $2.8B was the year's real test, and that a 2026 guide below $8B would be a genuine thesis event. The fourth quarter delivered $3,195M of free cash flow on $4,165M of operating cash flow, taking the full year to $7,940M and $10,567M respectively, and the 2026 guide came in at $8.25 to $8.75B with a complete walk attached.

"Free cash flow for the quarter was very strong at $3.2 billion bringing our full year free cash flow to $7.9 billion as Chris said. This included approximately $1 billion of powder metal related compensation, approximately $600 million of tariff related impacts." — Neil Mitchill, Chief Financial Officer

Two normalizations matter. Adding back the powder-metal compensation puts 2025 at $8.94B, above the $8.0 to $8.5B baseline the CFO offered in October as the right way to look through the payments. And the 2026 midpoint of $8.5B against the adjusted net income implied by $6.70 of EPS on roughly 1,375M shares is about 92% conversion, inside the 90 to 100% long-term framework management described last quarter. The 2026 walk itself is $1.1B of operational improvement including a slight working-capital tailwind, plus $300M from lower powder-metal payments, less $500M of higher capital expenditure and $300M of other items.

Assessment: This resolves the debate we said was live at initiation, and it resolves it in the bulls' favour on every axis we named: the full year cleared the unraised range, the fourth quarter cleared its implied requirement, the normalized baseline was exceeded, and the forward guide arrives with a conversion framework rather than a framework-level answer. Our conviction on the business is higher after this print than before it. That is precisely why the rating change is about price rather than about the company.

6. The Margin Streak Ended, and the Company Did Not Mention It

Six consecutive quarters of year-over-year adjusted segment margin expansion was the statistic we used in October to separate this cycle from RTX's last one. The fourth quarter broke it: 11.6% against 11.9%, down 32 basis points. Neither the release nor the call acknowledged the change, and both narrated margin segment by segment, where the story is more flattering. Mix explains 19 of the 32 basis points, because Pratt grew 25% at an 8.2% margin while Collins and Raytheon grew 3% and 7% at 15.8% and 11.6%. The release's own disclosure explains most of the rest: removing the approximately $70M prior-year insurance recovery at Pratt from the year-ago base leaves consolidated adjusted segment margin roughly flat.

"This was partially offset by the impact of commercial aftermarket mix, higher tariffs across the business, higher SG&A expense and the absence of an approximately $70 million prior year insurance recovery." — Nathan Ware, Vice President, Investor Relations

For the full year the picture is unambiguous: adjusted segment margin expanded 47 basis points to 11.9%, with all three segments expanding, Raytheon by 130 basis points, Collins by 30 and Pratt by 20. The fourth quarter is the exception rather than the trend, and the exception has identifiable causes.

Assessment: We do not think the streak breaking is a thesis event, and the arithmetic supports management's implicit framing. We do think the silence is worth noting on a call that was otherwise generous with numbers. A company that led every quarter of 2025 with its margin-expansion count and then stopped counting is telling you something about the quarter, even if what it is telling you is only that the prior-year base was unusual.

7. The Geared Turbofan: Groundings Down, and a Commitment That Came in Four Points Light

October produced the clearest gradeable promise of our coverage: full-year PW1100 maintenance output growth of roughly 30%, from 21% year to date, confirmed rather than hedged when the CEO was pressed on the arithmetic. The answer is 26%. The fourth quarter grew 39%, which is the strongest quarter of the year and shows the ramp was real, but the year fell four points short of the number management confirmed with one quarter to go. What the company offers against it is heavier work: heavier shop visits rose 40% in 2025, so throughput per visit absorbed capacity that a unit-count measure does not credit.

"AOGs did come down in Q4, and they're down over 20% from the highs of 2025. So making good progress there. As I've said before, you know, MRO output remains a key enabler, and that continues to improve. The 1,100 output, as we said upfront, was up 26% last year, and that was with heavier shop visits increasing 40% year over year." — Chris Calio, Chairman and Chief Executive Officer

On the outcome metric, this call is an improvement on the last one. Aircraft on ground are down more than 20% from the 2025 peak, the first quantified statement management has made about the number that investors actually track, though still expressed as a percentage off an undisclosed base rather than a count. For 2026 management expects output growth of "in line with what we saw in 2025", which is roughly 26% and not a second attempt at 30%, with continued AOG reduction through the year.

Assessment: The recovery is on a real trajectory and the specific promise was missed, and both statements are true. The way we read the 2026 guide is that management has reset the output pace to one it can hold rather than one it has to chase, which is the right call after a four-point shortfall and a lesson in how heavier work scopes interact with unit targets. We will grade the 2026 figure against 26% rather than against anything higher.

8. GTF Advantage Moves From Certification to Entry Into Service

The fourth quarter delivered the first of the three GTF Advantage milestones. European certification of the engine is in hand, aircraft certification is expected soon, and production cut-in has begun, with entry into service expected later in 2026. The associated hot section plus upgrade package, which management says carries 90 to 95% of the Advantage's durability benefit, is expected to be certified and installed for maintenance customers later in the year, which is the mechanism by which the durability improvement reaches the engines already flying rather than only new deliveries.

"In the fourth quarter, we received the EU certification of the GTF advantage engine and expect aircraft certification soon. We have begun production cut in of the advantage engine and expect entry into service later this year along with certification and first installations of the associated hot section plus upgrade package for MRO customers." — Chris Calio, Chairman and Chief Executive Officer

The economic case sits in the aftermarket margin rather than the delivery line. Management put GTF aftermarket margins at low double digits and guided one to two points of expansion in 2026, attributing it to durability improvements already going into the fleet, the contract structures written for later-vintage engines, and pricing. That is the mechanism by which Pratt's segment margin eventually moves, since new-engine deliveries remain margin-dilutive.

Assessment: Entry into service in 2026 converts the Advantage from a certification story into a deliverable one, and the retrofit package is the more valuable half because it addresses the installed base rather than the order book. One to two points on a low-double-digit aftermarket margin is a modest-sounding number attached to a revenue stream growing high single digits off a rapidly expanding installed base, which is how Pratt gets from 8.3% toward double digits over several years rather than several quarters.

9. Raytheon's Order Book and Raytheon's Productivity Line Now Disagree

Raytheon booked $10.3B in the quarter for a 1.35 book-to-bill, closed the year at 1.43 on roughly $40B of awards, and carries a record $75B backlog at 47% international content. Output on the critical munitions programs, GEM-T, AMRAAM and Coyote, rose 20% in 2025 and is guided to increase significantly again in 2026 with SM-6 and Tomahawk added to the list. On the input side, land and air defense systems recorded an eleventh consecutive quarter of material growth, and 85% of the segment's 2026 sales already sit in backlog.

"At Raytheon, the team leveraged core to significantly increase munitions output across the business in 2025. Notably, we saw output increase by 20% across a number of our critical programs, including GEMT for the Patriot Air and Missile Defense System, AMRAAM, which is the premier air-to-air combat proven effector, and Coyote to support counter UAS capabilities." — Chris Calio, Chairman and Chief Executive Officer

Against that, the margin guide asks for very little. Adjusted operating profit up $200M to $300M on sales up mid to high single digits implies a 2026 adjusted margin of roughly 11.4 to 11.8% against 11.5% delivered in 2025, after 130 basis points of expansion in 2025 and 180 in the third quarter alone. The reason is the productivity line: about $160M of year-over-year improvement in each of the last two years, guided to roughly $25M in 2026.

Assessment: Volume and mix are both moving in Raytheon's favour and the margin guide still says flat, which means the incremental volume is arriving at roughly the segment's existing margin rather than above it. That is consistent with a munitions capacity ramp, where new lines and new suppliers cost money before they earn it, and it is the honest explanation for why the productivity tailwind flattens. It also means the defense super-cycle pillar is now a growth argument rather than a growth-and-margin argument for at least a year.

10. The Margin Baton Passes From Raytheon to Collins

Consolidated segment margin is still guided to expand in 2026, and the composition of that expansion changes completely. Collins, which contributed 30 basis points of its own expansion in 2025 while absorbing a 90 basis point tariff drag, is guided to add another 80 basis points at the midpoint. Pratt's profit guide implies roughly 30 to 50 basis points. Raytheon implies roughly flat. In 2025 the ranking was the reverse, with Raytheon at 130 basis points and Collins at 30.

"as you go to 2026, inclusive of tariffs, we're gonna see another 80 basis points of margin expansion at the midpoint. As I said a couple minutes ago, Collins has a ton of effort going into digitizing the back office, streamlining their footprint, and we're seeing the benefits of that cost reduction activity already come through in these margins." — Neil Mitchill, Chief Financial Officer

Collins' drivers are unusually well specified for a self-help programme: back-office digitization, footprint consolidation, pricing, roughly $75M of tariff relief, and volume drop-through on 10% original-equipment growth and high-single-digit aftermarket growth, with about 45% of the segment's growth coming from aftermarket. The offsets are named too: an approximately $50M divestiture headwind, an extra quarter of tariff expense that depresses the first quarter, and original-equipment margins the CFO characterized as low double digits, which is below the segment average.

Assessment: A margin story that rotates from mix and productivity at one segment to structural cost reduction at another is not a weaker story, and self-help is arguably more durable than favourable international mix. It is a less verifiable one from the outside: there is no equivalent of the net productivity dollar figure that let us audit Raytheon's progress each quarter. Collins' quarterly aftermarket sub-channel mix is the best available proxy, and it moved the wrong way this quarter.

11. Capital Deployment Under Political Pressure, and a Buyback That Is Still Not There

The genuinely new topic on this call was political. An executive order concerning how defense companies deploy capital, together with a social-media post from the administration that named RTX, put the capital-allocation question on the agenda in a form it has not taken in our coverage before. The pressure runs in one direction: toward capacity investment and away from returning cash. Management's answer was to accept the framing on urgency, defend the dividend, and not mention repurchases.

"As it relates to capital allocation, again, we recognize our shareholders rely on our dividends. They've come to expect our dividends. We've been paying them for decades on a quarterly basis. So we remain committed to the dividend. That said, again, we're comfortable we can accommodate both that and the investment needs that come with delivering the current backlog and the potential future volumes on key programs." — Chris Calio, Chairman and Chief Executive Officer

The 2025 numbers show what the policy has been in practice. Dividends paid were $3,574M, up 11.1%. Share repurchases were $50M for the year and nil in the fourth quarter, against $444M in 2024. Debt repayment was $3,429M, including $1,140M in the fourth quarter, and management expects to pay the roughly $3.4B coming due in 2026. Capital expenditure steps up from $2,627M to approximately $3.1B.

Assessment: Prioritizing capacity over buybacks is defensible on the business case and now close to mandatory on the political one, and we would not want the trade made the other way at 30 times earnings. But it removes a support many defense holders assume exists, it means per-share growth must come entirely from earnings, and the $0.05 share-count headwind in the 2026 EPS walk is the recurring cost of it. The words "repurchase" and "buyback" did not appear anywhere in the call.

12. Golden Dome, Capacity Spending, and the Money Still Outside the Backlog

The capacity commitment for 2026 is $10.5B across capital expenditure and company- and customer-funded research and development, including approximately $3.1B of capital expenditure against $2.6B last year, with research and development approaching $3B. The named projects map directly onto the demand management says it can see: Raytheon in Tucson and Andover for munitions and sensors including the standard missile family, AMRAAM, Tomahawk, Patriot and LTAMDS; Collins in Richardson, Texas and on the Survivable Airborne Operations Center and E130J; Pratt in Columbus, Georgia for forging and Asheville for a turbine airflow casting foundry, whose output the CEO placed in the 2028 to 2029 time frame.

"In 2026, we plan to invest another $10.5 billion in CapEx in company and customer funded research and development, including another $3.1 billion in CapEx on top of the $2.6 billion I just highlighted for last year." — Chris Calio, Chairman and Chief Executive Officer

On Golden Dome, management described a multilayered architecture in which it believes it has solutions at each layer, named Patriot, GEM-T, SPY-6 and Coyote, and alluded to capabilities in space it declined to discuss. No RTX share, no timing and no expected booking window were given. Notably, the roughly $50B of reconciliation funding for munitions replenishment and Golden Dome that the CEO volunteered unprompted in October went unmentioned on this call, by management and by every questioner.

Assessment: The investment is being made ahead of a demand signal the company can see and cannot yet book, which is the correct posture and an uncomfortable one for free cash flow: $500M of the 2026 capital expenditure step-up is a direct charge against the cash line for capacity that earns nothing until 2027 and later. We continue to model nothing for Golden Dome. What changed this quarter is that the capacity spending against it is now specific and dated while the revenue against it is neither.

13. Powder Metal Is Almost Paid For

The geared turbofan powder-metal matter has been the largest single suppressant of reported free cash flow for two years, and this call put an end date on it. Compensation payments were approximately $1.0B in 2025, are placed at $700M in the 2026 outlook, and bring the cumulative total to $2.8B against a roughly $3B expectation set when the fleet management plan was announced.

"in our outlook for 2026, we have $700 million place held as the cash outflow. We exited 2025 with $1 billion. So cumulatively, we're at $2.8 billion when you get through the end of 2026. We had talked about that being about a $3 billion cash headwind to us over over the period of time we execute the FMP. So that leaves a couple $100 million." — Neil Mitchill, Chief Financial Officer

That is the mechanical cash tailwind the bull case has rested on, now quantified and dated: $300M in 2026, and roughly $500M more spread across 2027 and beyond as the residual few hundred million is paid and the stream ends. Management also repeated that the financial and technical outlook on the plan is unchanged, which is now a three-year run of an unrevised provision on a matter of this size.

Assessment: This is the part of the thesis that has aged best. A provision of roughly $3B, set two years ago on an engineering matter with genuine tail risk, tracking to plan through completion is strong evidence about management's technical and commercial control. It also means investors can now stop normalizing for it: from 2027 the reported free cash flow number is close to the real one, and the argument shifts from a normalized baseline to an actual yield.

Guidance & Outlook

The segment profit guides are worth reading together rather than separately, because the 2026 ranking inverts 2025's. Collins moves from the smallest raise to the largest guide, and Pratt and Raytheon guide at the midpoint to about 73% and 59%, respectively, of the dollar growth they were guided to deliver in 2025. Aggregated, the three ranges sum to $850M to $1,150M of incremental segment profit against $1,075M to $1,225M guided for 2025, so total segment profit growth is guided a little slower in dollars and considerably slower as a percentage off a larger base. On sales, the composition is the reverse of the profit picture: Collins is guided up mid single digits on an adjusted basis and high single digits organically, Pratt up mid single digits, and Raytheon up mid to high single digits, so the fastest-growing segment on the top line is the one guided to the least margin progress.

Implied margins from the segment guides. Applying each segment's profit-guide midpoint to sales grown at the low and high ends of its own sales guide implies Collins at 16.8 to 17.1% against 16.2% in 2025, Pratt at 8.6 to 8.8% against 8.3%, and Raytheon at 11.4 to 11.8% against 11.5%. The Collins figure corroborates the CFO's 80 basis points at the midpoint. The Raytheon figure is the disclosure the guide does not advertise.

Street position. The 2026 adjusted EPS midpoint of $6.70 sits below our October estimate of $6.85 and roughly in line with where the Street had been carrying the year. The company's pattern in 2025 was to guide to the visible and let outperformance accumulate into subsequent guides, and it finished above the top end of all four metrics, so the initial range should be read as a floor rather than a forecast. Even so, a company that must beat its own opening guide to justify a 30 times multiple is in a different position than one whose guide already supports it.

Guidance style. Conservative and consistent. RTX raised twice and cut once in 2025, with the cut attributable to two identifiable external shocks, and then cleared the top of every line. The opening 2026 range is set off a backlog position management described as 85% covered at Raytheon, which is the highest visibility any of the three segments has carried into a year in our coverage. The one thing the guide does not do is size the consolidated tariff exposure for 2026; only the Collins piece was quantified.

Analyst Q&A Highlights

The Geared Turbofan Plan Entering Its Third Year

The call's opening question went straight to the fleet management plan and asked, in effect, for a scorecard. The answer volunteered the aircraft-on-ground direction for the first time and reported full-year maintenance output growth of 26%, four points below the roughly 30% management had confirmed three months earlier. The shortfall was stated as a fact rather than framed as a miss, and no follow-up pressed it.

Q: "Yeah. So so many topics here to talk about in '26, but I guess I'd want to start with the GTF fleet management plan. It's year three here, and your financial and technical outlook has remained on track the entire time. Maybe can you give us the latest kind of update in any key items we should expect, going forward with the plan?"
— Peter Arment, Baird

A: "AOGs did come down in Q4, and they're down over 20% from the highs of 2025. So making good progress there. As I've said before, you know, MRO output remains a key enabler, and that continues to improve. The 1,100 output, as we said upfront, was up 26% last year, and that was with heavier shop visits increasing 40% year over year."
— Chris Calio, Chairman and Chief Executive Officer

Assessment: The exchange produced the disclosure we asked for in October, a direction and magnitude on groundings, and it also confirmed that the one hard commitment from that call was not met. Both matter, and the second one matters more for how we read future targets: the company set a specific number with a quarter to go, confirmed it under questioning, and landed four points short. We now discount confirmed operational targets by rather more than we did.

Political Pressure on How Defense Primes Deploy Capital

A question framed around an executive order on defense-sector capital deployment, and a social-media post from the administration naming the company, invited management to say how it intends to respond. The answer conceded the premise on urgency, committed to the dividend, and declined to treat investment and returns as competing claims. What it never mentioned was share repurchases.

Q: "Maybe broadly, Chris, how are you thinking about you know, we got this executive order about how defense companies deploy capital you know, RTX was highlighted in, you know, a social media post by the administration. How are you broadly thinking about that? And, you know, what's it mean to you as a manager of the business? Like, how do you handle all that?"
— Ronald Epstein, Bank of America

A: "And, you know, candidly, we understand the frustration. And I can tell you our focus and resources are fully aligned with the department's mandate to ramp production and invest in capacity. And as we said upfront, we made some progress in 2025. I think some very good progress. Output was up over 20% on a number of the critical programs. But there's more to do."
— Chris Calio, Chairman and Chief Executive Officer

Assessment: A chief executive saying in public that "we understand the frustration" of his largest customer tells you where the pressure sits. For shareholders the practical consequence is that the capital-allocation question has been settled for the foreseeable future by a party other than the board: capacity first, dividend protected, repurchases indefinitely deferred. That is a reason to model a rising share count rather than a falling one, and it is now a structural feature of the story rather than a balance-sheet phase.

Whether the Pratt Original-Equipment Guide Is Too Conservative

With airframe production rates rising, the low-single-digit original-equipment guide at Pratt looked out of step with the demand signal, and the question put that directly. The answer explained it as a deliberate allocation decision rather than a demand constraint: total engine output grows mid to high single digits, installs grow, spare-engine deliveries stay roughly flat, and the mix between supporting the flying fleet and supplying the airframer is being managed rather than maximized.

Q: "Probably a question for Neil regarding the 2026 guidance. Your forecast for Pratt and Whitney particularly on the OEM side, looks a bit conservative, particularly given what Airbus is planning on the A320 and A220 going forward here. So I was wondering if you could perhaps delve into the components a bit more, particularly aerospace OEM."
— Robert Stallard, Vertical Research Partners

A: "I think if we look inside of the install side, we still see growth on both the installs and probably flattish on the spare engine deliveries for 2026. So little mixed headwind on the top line, but in terms of output, strong output throughout the course of this year. You know, if it's better, you'll see that, but, you know, we're really trying to make the right balancing decisions for between MRO and install."
— Neil Mitchill, Chief Financial Officer

Assessment: The honest content of the answer is that Pratt is rationing engine hardware between three claimants, new aircraft, spare engines and the maintenance network, and is choosing the maintenance network. That is the right choice for the groundings problem and for aftermarket economics, and it caps original-equipment revenue in the near term. It also means the original-equipment guide is conservative in a specific sense, that output could be better, rather than in the general sense that the whole segment is sandbagged.

Why Commercial Aftermarket Growth Halves in 2026

The sharpest analytical question of the call asked why the strongest line in the business decelerates from 18% to high single digits directly after a quarter in which it grew 21% at Pratt. The answer was a full decomposition, and its content is that the deceleration is legacy-engine arithmetic rather than a demand change: Pratt Canada grows high single digits, V2500 shop visits stay flat at slightly above 800, the older PW4000 and PW2000 overhauls decline as those fleets retire, and the geared turbofan aftermarket keeps stepping up.

Q: "Neil, why does Pratt commercial aftermarket growth slow to high single digits in 2026? Particularly given the strength you saw here in the fourth quarter? And then the commentary on GTF MRO volumes."
— Scott Deuschle, Deutsche Bank

A: "About 70% of Pratt's growth in '26 is going to come from commercial aftermarket. We talked about that being up high single digits... There's a little bit of offset on the PW4000s and 2000s as those older engines start to retire. Those are expensive overhauls, and know, we're seeing a little bit of headwind there, probably about $100 million for 2026. All things that we saw coming and we planned aligned with, our customers, fleet plan."
— Neil Mitchill, Chief Financial Officer

Assessment: This is the most reassuring answer on the call for the commercial-cyclicality debate, because it puts a specific and modest number on the only identified headwind and attributes the rest of the deceleration to a flat comparison on the V2500 and an 18% base. Nothing in it suggests demand softening. It does confirm that 2026 is the year the legacy-engine tailwind stops compounding and the geared turbofan has to carry the aftermarket line alone, which is a transition worth watching for its own sake.

Raytheon's Margin Ceiling and the Productivity Tail

With international mix rising and volume accelerating, the natural question is how much further the segment's margin can travel. The answer put the 2026 outlook close to 12% and said there is no reason margins cannot exceed it, which is a warmer characterization than the profit guide itself supports. The same answer, earlier in its sequence, supplied the powder-metal cash numbers.

Q: "One, a follow-up to the prior question just on Raytheon Defense. Productivity. And you also have you know, higher volumes and better mix over time with the foreign backlog conversion and the sales. So what's your updated thoughts on eventual margin entitlement for that segment?"
— Gautam Khanna, TD Cowen

A: "Our outlook for 2026 puts us, you know, pretty close to the 12% range that we talked about. And as you pointed out, the international mix is increasing. Today, our backlog has about 47% international mix in it... there's no reason to believe that the Raytheon margins can't be north of 12%, and we're certainly well on our way in this outlook that we put out today."
— Neil Mitchill, Chief Financial Officer

Assessment: The phrase "pretty close to the 12% range" is doing real work, because the segment printed 11.5% in 2025 and the profit guide implies roughly 11.4 to 11.8% in 2026. The gap between the tone and the arithmetic is the most important thing to carry out of this call on the defense pillar. We would rather have the arithmetic, and the arithmetic says a year of consolidation before the next leg.

The Collins Margin Bridge, and a Questioner Who Did the Work

The one question that arrived with its own model attached asked why a segment with double-digit narrowbody original-equipment growth, 10% aftermarket growth and a productivity plan in place was guided to only 30 basis points of organic margin expansion once the divestiture benefit was stripped out. The answer corrected the premise upward and supplied the tariff bridge that explains the 2025 result.

Q: "I wanted to ask about Collins because I feel like it's a bit forgotten. Given everything else going on. You know, Collins embed 70 basis points of margin expansion. 40 basis points of that is the divestiture benefit. So only 30 bps organically. But it seems like there's a lot of good good things going on in the segment... Maybe if you guys could bridge us and obviously a full year of tariffs is maybe some of that offset."
— Sheila Kahyaoglu, Jefferies

A: "We do expect to see a bit of a tailwind as we move from 2025 to 2026 on tariffs, probably $75 million lower. And keep in mind, we're picking up an extra quarter of tariff expense in 2026. So the first quarter will be a little bit depressed on the Collins margins. As they pick up an extra quarter. But nonetheless, I'm still seeing real really good margin expansion there."
— Neil Mitchill, Chief Financial Officer

Assessment: The exchange resolved to 80 basis points of expansion at the midpoint, inclusive of tariffs, against the 30 the questioner had modelled, and the difference is the cost-reduction programme rather than the tariff line. The operationally useful detail is the warning that the first quarter specifically carries an extra quarter of tariff expense, which means a soft Collins margin in the March quarter should be read as calendar arithmetic rather than as the self-help programme failing.

Golden Dome and Whether RTX Will Front the Research Spending

A question about space-based interceptors carried a sharper edge than it first appeared: the administration wants contractors to fund development ahead of awards, and RTX already has a full plate. The reply on capability was expansive and the reply on money was carefully conditional, with a dollar figure attached to total research spending rather than to this programme.

Q: "But in terms of missile defense and the Golden Dome initiative, you know, we understand that the administration's looking for contractors to step out a little bit more there in in terms of, you know, fronting our R&D to, you know, to be involved in in that effort. Particularly with with space based interceptors. And wondering how you're thinking about that given both Raytheon's traditional capabilities in missile defense, but also know, we're we're pretty full plate in terms of ramping up some of the the existing programs."
— Seth Seifman, JPMorgan

A: "Seth, I would just add that with respect to the investment and our our willingness to invest, we we, of course, would invest in in good business. And so we're prepared to, you know, make the right choices there. Our R&D for 2026 is gonna approach $3 billion with a healthy portion of that sitting in Raytheon, obviously. So, you know, we're prepared to make those investments when it makes sense to do so."
— Neil Mitchill, Chief Financial Officer

Assessment: A willingness to invest in good business is a condition, not a commitment, and it is the right answer to a request that contractors take programme risk onto their own balance sheets. The disclosure that matters is the $3B research figure, because it establishes that RTX intends to be a participant rather than a bystander while declining to pre-commit capital to an unawarded programme. We continue to carry Golden Dome as optionality with nothing modelled.

Pratt's Long-Term Margin as the Two Fleets Cross Over

The most analytically constructed question of the call set up the structural bear case on Pratt: falling groundings return geared-turbofan aircraft to service, which parks V2500-powered aircraft and reduces the spare-engine ratio, so the high-margin legacy stream erodes just as the dilutive new-engine stream grows. The answer reframed the arithmetic around fleet size rather than ratios.

Q: "But how should we think about the longer term margin at Pratt? Because on one hand, you have that benefit, but as AOGs start coming back, you may have two other effects, which are you may see some PW1100 powered airplanes lead to parking of some V2500s. And you're gonna have some decline in spare engine ratio. So how should we think about combining all of those things? For the long term Pratt margin?"
— Douglas Harned, Bernstein

A: "I think with respect to the size of the fleet, today's GTF fleet is about the same size. In fact, I think it's a little bit larger than the installed flying V2500 fleet. So sort of to compensate for what will ultimately be retirements as you look out a number of years, that GTF fleet is just growing at really significant rate. And so that will overcome sort of lost revenues and and profits that will, you know, see on the V2500 as it retires."
— Neil Mitchill, Chief Financial Officer

Assessment: The disclosure that the geared turbofan fleet has now passed the flying V2500 fleet in size is the most important fact in the exchange and one we had not seen quantified before. It converts the legacy-erosion question from a timing problem into a margin-per-visit problem: the volume is covered, and the issue is whether geared turbofan aftermarket margins in the low double digits can climb toward V2500 levels. Management guided one to two points of that climb for 2026, which is a start and not an answer.

What They're NOT Saying

1. No acknowledgement that the 30% maintenance output commitment was missed. Full-year PW1100 output grew 26% against the roughly 30% the CEO confirmed on the October call when pressed on the arithmetic. The figure was reported twice, in the prepared remarks and again in the first answer, both times alongside the 39% fourth quarter and the 40% increase in heavier shop visits, and never against the target. No questioner raised the gap either.
2. Still no aircraft-on-ground count. The call's "down over 20% from the highs of 2025" is progress on last quarter's total silence, but it is a percentage off an undisclosed base. The word appears eight times in the call and never with a number attached to it. Every input to the recovery is quantified; the output metric investors actually track is expressed only as a direction.
3. No consolidated tariff figure for 2026. The Collins piece was sized, roughly $75M lower year over year with an extra quarter of expense loaded into the first quarter. Pratt's 2026 tariff exposure was not sized, and neither was the consolidated number, despite tariffs costing approximately $600M of cash in 2025 and being named as a margin offset at both commercial segments this quarter.
4. No mention of share repurchases, at all. The words "repurchase" and "buyback" do not appear anywhere in the call. Repurchases were nil in the quarter and $50M for the year against $444M in 2024, and the capital-allocation question was answered by naming the dividend and investment. With an executive order on defense capital deployment in the background, the omission now looks like policy rather than timing.
5. The roughly $50B of reconciliation funding has disappeared from the narrative. In October the CEO volunteered, unprompted, that the money for munitions replenishment and Golden Dome was not in the backlog and was potentially additive. On this call it was not mentioned by management or by any questioner. Golden Dome came up four times and never with a dollar figure, a share or a booking window.
6. No 2027 framing for the commercial cycle. The word "2027" appears once in the entire call, in a question about the powder-metal payment tail. The elevated-oil and travel-demand questions that shaped the debate around this stock through 2025 went unasked and unaddressed, and the outlook stops at the end of 2026.
7. No headcount figure. The release repeats "more than 180,000 global employees" with no year-over-year change, and the call gives no headcount number. Ten percent year-to-date organic growth delivered on flat headcount was the specific statistic that carried the margin-durability argument in October, and 2025's version of it is not disclosed.
8. No output figure attached to the $3.1B of capital expenditure. The projects are named site by site and the Asheville foundry is dated to 2028 or 2029, but nothing says what units, throughput or deliverable revenue the spending buys, or when. The demand side of the defense case is quantified to the program; the supply side is described.
9. No segment-level cash or conversion detail. The free cash flow walk is consolidated only. With Raytheon carrying customer advances, Pratt paying powder-metal compensation and Collins absorbing tariffs, three very different cash profiles are netted into one $8.5B midpoint, and there is no way to see which segment is funding which.
10. No remaining powder-metal obligation balance. The residual described as "a couple $100 million" after 2026 is a helpful characterization and not a number, and the total remaining obligation, as distinct from the annual payment, has never been given. The cash tail is now small enough that this matters less than it did, which is presumably why nobody asked.

Market Reaction

• Pre-print setup: RTX closed at $194.13 on January 26, up 5.9% year to date against 1.5% for the S&P 500, up 55.2% over the trailing twelve months, and up 4.8% over the trailing thirty days. The 52-week closing range entering the print was $113.75 to $201.92, so the stock sat about 4% below its 52-week closing high after a very strong year.
• Reaction session (January 27, before the open): the stock gapped open at $199.51, up 2.8%, traded a range of $195.44 to $202.20, and closed at $201.28, up 3.7% or $7.15. The close is just below the 52-week closing high of $201.92 rather than a new one.
• Volume: 10.1 million shares against a 30-day average of 4.9 million, a 2.1 times multiple. Real participation rather than a thin gap.
• Market context: the S&P 500 gained 0.4% on the session, so essentially all of the 3.7% is idiosyncratic.

The market bought the backlog and the cash line. A 5.4% adjusted EPS beat in a quarter where adjusted EPS grew 1% and segment margin fell would not, on its own, move a $274 billion company 3.7% on twice normal volume. What changed the picture was the combination of a 23% increase in backlog to $268 billion, a full year that cleared the top of every guide line it had set, and a free cash flow number that finally arrived after three quarters of being defended rather than raised. The 2026 guide neither helped nor hurt: its midpoint of $6.70 is below where we had the year and roughly in line with the Street, but its four components each arrived with a walk attached, which is a different quality of disclosure than a range alone.

The intraday shape is worth noting. The stock traded as high as $202.20, above the 52-week closing high, and finished at $201.28. Unlike the October print, where the stock surrendered roughly a third of an 11.2% intraday gain as the guide arithmetic was worked through, this session held almost all of its move. That is consistent with a print whose weaker elements, the 1% EPS growth and the flat sequential margin, were pre-announced in October and therefore already in the price, and whose stronger elements, the cash and the order book, were not.

The setup, rather than the reaction, is what concerns us. A stock up 55% over twelve months, entering a print 4% below its high and leaving it 0.3% below, on a year that guides earnings up 6.5%, has repriced from cheap-for-the-quality to fully-valued-for-the-quality over the course of our coverage. That repricing is the substance of the rating change below.

Street Perspective

Debate: Is the 2026 guide conservatism or the real growth rate?

Bull view: The pattern is established and unambiguous. RTX guided 2025 adjusted EPS to $6.00 to $6.15 in January, cut it to $5.80 to $5.95 in July on external shocks, raised it to $6.10 to $6.20 in October and delivered $6.29. It beat the top end of all four FY25 metrics. The opening 2026 range is therefore a floor, and the same treatment applied to $6.60 to $6.80 puts the real number near $6.95. On that figure the multiple is 29 times, not 30, and the growth rate is 10%, not 6.5%.

Bear view: The decelerations in the guide are specific and sourced, not conservative placeholders. Commercial aftermarket goes from 18% to high single digits with a named $100 million legacy-overhaul headwind. Raytheon net productivity goes from roughly $160 million to roughly $25 million. Capital expenditure rises $500 million. Pension income falls $0.13 of EPS permanently. The share count rises because buybacks are politically constrained. Each of those is a disclosed mechanism rather than a sandbag, and together they account for most of the gap between 9% segment profit growth and 6.5% EPS growth.

Our take: Both sides are describing different things. The beat is likely and the wedge is structural, and they are not in conflict: RTX can beat $6.80 and still grow per-share earnings slower than segment profit for years. What settles the debate for the stock is that the bull case requires the beat to arrive before the multiple can be justified, which makes the position a bet on execution already proven rather than on a re-rating or an inflection. That is a reasonable bet at 25 times and a thin one at 30.

Debate: Has Raytheon's margin story stalled or paused?

Bull view: A 47% international backlog at a record $75 billion, 85% of 2026 sales already booked, munitions output up 20% with another significant increase guided, and eleven consecutive quarters of material growth is a segment in its strongest position in a decade. The 2026 margin guide is flat because capacity is being added, and capacity costs money before it earns any: Tucson, Andover, Huntsville and Camden all ramp through the year. The productivity line resumes once the new lines mature, and the international mix keeps rising.

Bear view: The segment added 130 basis points in 2025 and is guided to add nothing in 2026, at the exact moment volume and mix are both improving. If incremental international munitions revenue arrives at the segment average margin, then the entire premise that this backlog is more profitable than the last one is wrong. The productivity disclosure is the tell: a line running at $160 million a year for two years does not fall to $25 million because things are going well.

Our take: The capacity explanation is credible and it is also the explanation that would be offered either way, which is why we weight the arithmetic over the narrative. A pause is the more likely reading given the specific projects ramping and the volume behind them, but it is a pause investors are being asked to pay for in advance. We model Raytheon at 11.5 to 12% through 2026 and will treat a return of the productivity line, not the backlog number, as the signal that the next leg is real.

Debate: Does $201 already pay for the defense super-cycle?

Bull view: A $268 billion backlog is roughly $197 per share against a $201 stock, up 23% in a year, and it still excludes Golden Dome and the munitions replenishment money entirely. The cash engine has now proven itself: $7.9 billion reported, $8.9 billion normalized, $8.5 billion guided with 92% conversion, and the powder-metal suppressant ends in 2027. NATO allies are committed to moving from roughly 2% of GDP to approximately 3.5% by 2035. For a franchise with that visibility, 30 times is what quality costs.

Bear view: The stock is up 55% over twelve months and 16% since late October, and over that same window the company guided next year only in line with where the Street had it. Thirty times current-year earnings on a 6.5% grower with a 3.1% free cash flow yield and no buyback is a full price by any measure, and backlog per share is the weakest possible support for it: management has said for three quarters that the supply chain, not demand, gates conversion. Everything that has gone right is now in the price, and the next catalyst is a March quarter with a depressed Collins margin and a tough Pratt comparison.

Our take: The bears have this one now, which is a change from October. We accepted a premium multiple at initiation on duration and on two cash suppressants with end dates. One of those suppressants is now nearly gone and the duration argument is intact, so the business case is stronger. But the price has captured all of it and a little more: our target of $195, set three months ago at 28.5 times a $6.85 2026 estimate we have not cut, sits below the current quote. Rolling the valuation base forward a year gets to $210, which is a mid-single-digit total return. We would rather own this at $180 than at $201, and saying so is more useful than reaching for a target that justifies the last 16%.

Model Update & Valuation Framework

Valuation. At the $201.28 reaction close, RTX carries a market capitalization of roughly $274 billion on 1,361.7 million diluted shares. That is 32.0 times the delivered FY25 adjusted EPS of $6.29, 30.0 times the FY26 guide midpoint of $6.70, and 29.4 times our unchanged FY26 estimate of $6.85. On cash, the FY26 guide midpoint of $8.5 billion is a 3.1% free cash flow yield, or 32.2 times, and the normalization argument that made that number look better is nearly exhausted: adding back the $700 million of 2026 powder-metal compensation takes the yield to 3.4%, against the 3.5% normalized figure we published in October on a much lower share price. Net debt is roughly $30.5 billion after $3.4 billion of repayment in 2025, with a further $3.4 billion due and expected to be paid in 2026. The dividend yields 1.3%.

Price target: $210, from $195. The target is 28 times our FY27 estimate of $7.50, trimmed half a turn from the 28.5 times we applied in October, and it equals 30.7 times our FY26 estimate. From $201.28 it implies 4.3% price appreciation plus a 1.3% dividend, a total return near 5.6%. The important arithmetic is what the target is not: applying October's 28.5 times to our unchanged FY26 estimate of $6.85 still produces $195, which is below the current quote. The target rises only because the valuation base rolls forward a year, on the same next-fiscal-year convention the October note used from its own vantage point. In other words, the stock has captured the entire gain our initiation thesis was underwriting, three months into a twelve-month view, and the remaining upside is the ordinary passage of time rather than a re-rating or a surprise.

Upside to the target would come from a 2026 beat of 2025's shape, which would put FY26 near $6.95 and pull FY27 toward $7.75; from Golden Dome or munitions replenishment awards entering the backlog with sizing attached; from Raytheon net productivity reaccelerating as the new capacity matures; or from a resumption of repurchases, which would close one of the three items in the EPS walk that erode operating growth. Downside risk is a March quarter that looks soft for reasons management has already flagged, an extra quarter of Collins tariff expense and a hard Pratt comparison, landing on a stock priced for none of it.

Thesis Scorecard Post-Earnings

The six pillars below are the framework established at initiation in October 2025 and are graded here against what this quarter's print and call revealed. They are unchanged in wording; only the status and the evidence move.

Overall: The thesis is stronger than it was at initiation and the stock is more expensive than the thesis is strong. Four of the six pillars improved, including the cash pillar that was the explicit reason conviction was held at 6 rather than higher. One pillar, Raytheon's margin, developed a genuine crack in the form of a productivity line guided down by roughly $135 million. And the valuation bear point has moved from a caution to a constraint that now binds: the share price exceeds the target we set three months ago, and closing the gap requires either a multiple we are not willing to pay or a 2027 estimate we are not willing to raise. We are also adding a seventh point to the standing thesis from this quarter's evidence, a political constraint on capital deployment following the executive order and the administration's naming of the company, which makes a rising share count a structural feature rather than a temporary one.

Action: Hold. We would not add at $201 and we would not sell a position established in the $170s, because nothing in the operating business argues for exiting and the backlog argues for patience. New money should wait for the low $180s, where 28 times our FY27 estimate offers a double-digit return rather than a mid-single-digit one. The three things that would move us back to Outperform are a first-quarter print that puts FY26 on a path above $6.90, a return of Raytheon net productivity toward its 2024 and 2025 run rate, and any sizing at all of the Golden Dome or munitions replenishment opportunity entering the backlog.