Key Points
USAF awarded RTX $8 billion to upgrade communications terminals for America's nuclear forces last week.
The contract is spread over 10 years.
It might add $0.07 per share to RTX's annual earnings over this period.
When you think of RTX (NYSE: RTX), probably three main things come to mind: Airplane parts (Collins Aerospace), airplane engines (Pratt & Whitney), and of course, the cornucopia of rockets and missiles manufactured by the company that preceded RTX -- Raytheon.
One thing I'll bet does not spring immediately to mind, though, is America's nuclear triad.
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And yet, that's the part of Raytheon that just won an $8 billion contract for RTX.
Image source: Getty Images.
Glowing green: RTX's $8 billion nuclear contract
On Tuesday, Oct. 13, the U.S. Air Force announced it has awarded RTX a sole-source contract worth up to $8 billion to restart production on modernized Air Force Nuclear Weapons Center Strategic Communications Terminals.
Based at Kirtland Air Force Base in New Mexico, the AFNWC serves as the Air Force's central hub for managing land-, sea-, and air-launched nuclear weapons, all part of America's strategic nuclear deterrent. Commands from the U.S. government pass through AFNWC en route to nuclear missile carriers along each leg of the nuclear triad. The Air Force didn't provide much information about the specific terminals RTX will be asked to upgrade, but it's likely the terminals that transmit these commands that are the subject of this contract.
What it means for RTX stock
The contract begins with an initial award of $800,000. The full $8 billion ceiling value of the contract is part of an effort to modernize "most parts of the nuclear triad at the same time," according to DefenceBlog.com. It will be paid out over 10 years, with a completion date in October 2036.
So what does this mean for RTX stock?
Strange as it sounds to say it -- not as much as you might think. Consider first that RTX is a gigantic aerospace company with $96 billion in annual revenue. RTX's $8 billion nuclear contract, spread over eight years, amounts to only $800 million per year -- less than 1% of RTX's total revenue, according to data from S&P Global Market Intelligence.
The good news is that the Raytheon segment is one of RTX's more profitable divisions. Although the smallest by revenue, Raytheon earns an 11.4% operating profit margin on the revenue that flows through it -- much better than the 7.9% margin at Pratt & Whitney, RTX's biggest business, but also much worse than the 16.2% margin at Collins Aerospace.
On average, these kinds of revenue at these kinds of profit margins imply that winning the nuclear contract might add $90 million or so in operating profit for RTX annually. That's a whole lot better than nothing, but it's still a rounding error next to the $$10.3 billion that RTX earned in operating profit last year.
Given the stock is currently valued at a 31x price-to-earnings ratio, I don't expect it to move the needle for RTX stock -- which still looks overvalued to me.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends RTX. The Motley Fool has a disclosure policy.