Arming for Growth
In this edition of the Smart Investor newsletter, we examine the stock of a dominant player in global aerospace and defense. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Uber Technologies (UBER) released a strong Q4 2024 report, reflecting strong growth across its key metrics, particularly in gross bookings, membership expansion, and EBITDA growth. However, challenges remain in the areas of AV commercialization, FX headwinds, and insurance costs.
Uber added five million new members to its Uber One program in Q4, bringing the total to 30 million, up nearly 60% year-over-year. The company reported a 21% year-over-year increase in gross bookings for Q4 2024, which exceeded their guidance and marked the fourth time in five quarters that they’ve achieved this level of growth. Uber’s Q4 2024 revenue rose 20% year-over-year, surpassing analyst expectations, although its operating income came in below the anticipated levels, primarily due to a $462 million legal settlement. Adjusted EBITDA grew 60% year over year, surpassing Uber’s target, while its annual FCF conversion as a percentage of EBITDA was 106%, far exceeding the target of 90%+.
For Q1 2025, Uber projected gross bookings of $42-43.5 billion, slightly below analyst forecasts, citing currency headwinds. The weaker-than-expected outlook disappointed investors, with UBER’s stock dropping post-earnings. Although the stock quickly rebounded on strong analyst support, its increase was a “small change” compared to the surge experienced after Pershing Square’s Bill Ackman disclosed a massive position in the company. The billionaire investor said he believes that “Uber is one of the best managed and highest quality businesses in the world,” and revealed that his fund began accumulating Uber’s stock in January, amassing 33.3 million shares by February 7th.
❖ Charles Schwab (SCHW) initially declined on the news that Toronto-Dominion (TD) Bank is divesting its 10.1% stake in in the company, valued at approximately $14.6 billion. TD Bank was Schwab’s largest institutional shareholder, and the exit of a strategic investor increases uncertainty. However, the stock rebounded as analysts and investors dug into the details of the sale. TD’s exit does not stem from a lack of confidence in SCHW but is the result of a large profit it made on SCHW, which it intends to use for its own share repurchase program.
Moreover, Schwab has agreed to repurchase $1.5 billion worth of its shares from TD, decreasing their additional supply to the market that was behind the initial negative investor reaction. In addition, TD’s divestiture considerably increases Schwab’s flexibility in governance and capital decisions. Furthermore, TD’s gradual exit had been expected, and its completion now removes uncertainty about future block sales. Several leading Wall Street analysts raised their price targets on SCHW.
❖ MetLife (MET) released a mixed set of results for its Q4 2024, which included a miss on revenue and an in-line adjusted EPS. The company’s report included some notable weaknesses, such as a decline in earnings in some business segments in Q4 and lower-than-expected private equity and real estate returns in full-year 2024. However, there were many positives, including a 116% year-over-year net income growth in Q4, and the full-year net income tripling from 2023.
Analysts and investors focused on the company’s guidance and strategic targets. MetLife introduced its New Frontier strategy, focusing on growth with four strategic priorities: extending leadership in group benefits, capitalizing on the retirement platform, accelerating growth in asset management, and expanding in high-growth international markets.
The New Frontier strategy aims for double-digit adjusted EPS growth, with a 60% contribution from business and margin growth and the rest from disciplined capital management. MET also increased its adjusted ROE target to 15-17% and committed to reducing its direct expense ratio to 11.3% by 2029. Furthermore, MetLife plans to generate $25 billion in FCF over the next five years.
❖ Amazon (AMZN) saw its shares drop after earnings release despite surpassing Q4 revenue and EPS estimates, as Q1 revenue guidance fell short of expectations and fourth quarter cloud growth disappointed. Amazon’s capex plans also pressured shares as the company said it expects to spend about $105 billion this year, mostly for AI-related investments focused on AWS.
However, AMZN rebounded in the days that followed, supported by massive price-target upgrades from nearly all top Wall Street analysts following the stock. Analysts view Amazon’s planned outsized capex as supportive of further AI expansion. In addition, analysts praised consistently increasing operating margins and the ongoing expansion in Amazon’s advertising revenue.
In addition, the Trump administration’s roll-back of plans to remove “de minimis” provision that allows small packages valued at less than $800 to enter the U.S. duty free also supported Amazon’s shares. The company’s retail business – its largest segment – continues to grow, albeit at a much slower pace than that of its cloud business.
❖ Salesforce (CRM) had a volatile week, with its shares dropping on announcement of the retirement of its COO Brian Millham, a key figure in Salesforce’s growth over the past 25 years, who will transition to an advisory role post-retirement. However, the company reassured investors with the appointment of Robin Washington – the former CFO of at Gilead Sciences and Hyperion, who’s been on the board of CRM since 2013 – to be its new president and COFO (chief financial and operating officer). Washington also currently serves on the boards of Alphabet (GOOGL), Honeywell and Vertiv.
CRM said that the newly created position of COFO isn’t just the combination of two positions but a role that is expected to lead the company’s next phase of transformation for the “new agentic era” of AI development. Within this transformation, Salesforce also announced plans to lay off over 1,000 employees, approximately 1.5% of its global workforce, while simultaneously hiring around 2,000 salespeople to promote its new AI products, including Agentforce.
Analysts at Wedbush expect Salesforce to be one of the two main beneficiaries of “the AI Software era” along with Palantir. Wedbush believes that that 2025 will see surging enterprise demand for AI software, with the “true adoption of generative AI” becoming a major catalyst for the stocks in the industry. The analysts also mentioned Oracle (ORCL), IBM (IBM), Innodata, Snowflake, MongoDB, Elastic, and Pegasystems as other software beneficiaries.
❖ Taiwan Semiconductor Manufacturing (TSM) reported a nearly 36% year-over-year increase in January revenue. Despite an earthquake that impacted some wafer production, TSM managed to avoid structural damage to its facilities and maintained operations. The company said it expects first-quarter revenue to be at the lower end of its guidance due to earthquake-related disruptions but maintained its full-year outlook.
In other company news, TSM is slated to produce custom chips for OpenAI, the maker of ChatGPT, which is trying to reduce its reliance on Nvidia. According to media reports, OpenAI is finalizing the design and will send it to TSM for fabrication in the next few months, with mass production targeted for 2026.
❖ Amphenol Corporation (APH) and EMCOR Group, Inc. (EME) saw their stocks drop after President Trump’s announcement of a 25% tariff on all steel and aluminum imports. Amphenol, a leading manufacturer of electronic and fiber optic connectors, relies on steel and aluminum for its products. The new tariffs may increase production costs, potentially affecting profit margins. Meanwhile, EMCOR provides electrical and mechanical construction services, utilizing significant amounts of steel in its projects. The tariffs could lead to higher material costs, impacting project profitability.
Although we have placed their fellow industrial stock, ITT, under review for a possible sale due to the tariff news (see below), we believe that APH and EME can manage the tariff impact and don’t expect to sell these stocks. Amphenol and EMCOR are far larger and better capitalized than ITT, with higher gross and operating margins giving them more room to absorb rising input costs without immediate pressure on earnings. Both APH and EME have stronger cash flows and lower leverage, meaning they can weather short-term volatility better. These champions project double-digit revenue growth rates for 2025, versus ITT’s 2-4% outlook.
Moreover, Amphenol and EMCOR operate in higher-margin and diversified sectors, with a much higher ability to pass costs to customers. Amphenol specializes in high-margin electronic components, where pricing power is stronger, and customers are less price-sensitive. EMCOR operates in construction and infrastructure services, where contractual cost pass-through mechanisms allow it to adjust pricing when material costs rise.
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Portfolio Stocks Under Review
❖ We are placing ITT (ITT) under review despite strong Q4 2024 results. The company reported a strong quarter, surpassing analyst estimates on revenue and EPS. Year-over-year, ITT’s revenue increased by 12%, with organic growth accounting for 6%. This growth was driven by higher volumes, pricing actions, and contributions from recent acquisitions. Operating income rose by 35% to $160 million, and the operating margin expanded by 290 basis points to 17.2%. The company’s adjusted EPS rose by nearly 12% year-over-year. Following these results, ITT announced a 10% increase in its quarterly dividend.
Looking ahead to 2025, the company projects adjusted EPS in the range of $6.10 to $6.50, below the consensus estimate of $6.49 at the midpoint, while the revenue forecast is slightly below the consensus estimate of $3.9 billion. The conservative forecast and external market factors have contributed to the recent decline in its stock price.
More concerning, President Trump’s recent announcement of a 25% tariff on all steel and aluminum imports, effective March 4, 2025, could significantly impact ITT. The company uses steel and aluminum in manufacturing its products, so new tariffs would raise material costs, potentially compressing profit margins.
Moreover, ITT may need to seek alternative suppliers or renegotiate existing contracts to mitigate cost increases, which could disrupt operations. Additionally, the price increases that may be needed to maintain pre-tariff profitability, could affect demand. All in all, while ITT remains a robust and profitable corporation, external developments such as tariffs may lead to stock underperformance.
❖ We are retaining Dell Technologies (DELL) in the “Under Review” list. Although its stock seems to have shaken off the “sticky” investor negativity that depressed the stock in the previous weeks, we believe it would be prudent to closely follow the developments at least until Dell reports its earnings at the end of the month.
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Portfolio Earnings and Dividend Calendar
❖ Smart Portfolio companies continue to release their earnings results. Cisco Systems (CSCO) will report today after hours, while Howmet Aerospace (HWM) is scheduled to release its results tomorrow. Arista Networks (ANET) and Matador Resources (MTDR) are expected to report on February 18th, while Texas Pacific Land (TPL) will reveal its quarterly results on February 19th.
❖ The ex-dividend date for Charles Schwab (SCHW) is February 14th.
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New Buy: RTX Corporation (RTX)
RTX Corporation is a leading U.S. aerospace and defense company, specializing in advanced technologies for commercial and military applications. The company delivers cutting-edge avionics, propulsion systems, and missile defense solutions to global customers. With a focus on innovation, cybersecurity, and sustainability, RTX supports defense modernization and next-generation aerospace development. Its extensive portfolio spans aircraft systems, space technologies, and precision weaponry, serving governments, commercial airlines, and industry partners. Positioned at the forefront of global security and aviation, RTX continues to drive advancements in mission-critical solutions and high-performance aerospace technologies.
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Mergers in Arms
RTX Corporation was formed in 2020 through the merger of Raytheon Company and United Technologies Corporation’s aerospace businesses, creating one of the world’s largest aerospace and defense firms. The combination strengthened RTX’s position across commercial aviation and defense, integrating Raytheon’s expertise in missile defense and cybersecurity with United Technologies’ capabilities in avionics and propulsion systems.
Over the past decade, RTX has expanded through strategic investments, major defense contracts, and technological advancements. The company has secured multi-billion-dollar contracts with the U.S. Department of Defense, including deals for Patriot missile systems, Next-Generation Interceptor (NGI), and classified space programs. Internationally, RTX has deepened partnerships with allied governments, supplying advanced defense solutions across Europe, the Middle East, and the Indo-Pacific region.
RTX has also invested heavily in hypersonics, directed energy weapons, and cybersecurity, reinforcing its role in next-generation military technologies. In commercial aerospace, Pratt & Whitney’s Geared Turbofan (GTF) engine has gained traction, securing orders from major airlines due to its fuel efficiency and sustainability benefits. The company continues to develop next-gen propulsion and hybrid-electric aviation solutions, aligning with long-term industry trends.
Recent years have seen portfolio reshaping, including the 2023 spin-off of Otis and Carrier, streamlining RTX’s focus on aerospace and defense. The company has also prioritized R&D, with billions allocated to AI-driven defense systems, autonomous technologies, and space-based capabilities.
Despite supply chain challenges and geopolitical uncertainties, RTX’s strong backlog, steady defense demand, and continued innovation have driven sustained revenue growth. With a market cap exceeding $170 billion and annual revenue (TTM) surpassing $80 billion, RTX is the largest U.S. aerospace and defense company based on market capitalization and total revenue. The company is ranked #55 on the 2024 Fortune 500 list.
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Defense on the Offensive
RTX Corporation generates revenue through a diversified portfolio spanning commercial aerospace, defense, and space technologies. The company’s three business segments – Collins Aerospace, Pratt & Whitney, and Raytheon – all contribute to its broad market reach, with a balance of government contracts, commercial sales, and aftermarket services. Each of these segments contributes about a third of total annual revenue, underscoring the company’s diversified presence in both commercial aerospace and defense sectors.
Defense and government contracts represent a significant portion of RTX’s revenue, with multi-billion-dollar agreements for missile defense systems, radars, avionics, and classified space programs. The Raytheon segment specializes in advanced defense technologies, including hypersonics, cybersecurity, and precision-guided munitions, positioning RTX as a critical supplier for the U.S. Department of Defense and allied governments.
On the commercial side, Pratt & Whitney plays a pivotal role in aviation propulsion, manufacturing engines for commercial, military, and business aircraft. Its Geared Turbofan (GTF) engine has gained traction for its fuel efficiency and lower emissions, securing contracts with major airlines and aircraft manufacturers. The aftermarket services business within this segment provides long-term revenue stability, as airlines and military fleets require ongoing engine maintenance, repair, and upgrades.
Collins Aerospace serves both commercial and defense markets, offering avionics, aircraft systems, and space technologies. The segment’s innovations in connected cockpits, autonomous flight, and space-based communications have driven growth in both the civil aviation and military aviation sectors.
RTX also invests heavily in next-generation aerospace technologies, including hypersonics, AI-driven defense systems, and hybrid-electric propulsion. With a robust backlog exceeding $180 billion, the company benefits from long-term revenue visibility and strong demand across its commercial and defense markets.
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Aiming for the Stars
RTX Corporation maintains strong financial health. While its net debt-to-equity ratio is moderately high, its investment-grade ‘BBB+’ rating from S&P Global Ratings reflects a solid fundamental profile.
RTX demonstrated strong financial health in the fiscal year ending December 31, 2024, reinforcing its leading position in the aerospace and defense sectors. The company achieved sales of $80.7 billion, marking a 9% increase over the prior year, with 11% organic growth when excluding divestitures. Adjusted EPS rose 13% to $5.73, reflecting profitability gains and margin expansion. These growth rates represent an acceleration compared to previous years, highlighting resilient demand across commercial aerospace and defense.
Analysts project continued expansion over the next two years, supported by RTX’s substantial backlog and sustained investments in next-generation technologies. In 2024, the company’s backlog reached a record $218 billion, comprising $125 billion in commercial and $93 billion in defense orders, providing significant revenue visibility for the coming years.
In 2024, RTX invested approximately $3.2 billion in R&D, accounting for about 4% of its annual revenue. Additionally, the company allocated $1.1 billion to capital expenditures during the same period, supporting infrastructure enhancements and capacity expansion. These strategic investments are pivotal in advancing RTX’s development of next-generation products and solutions, reinforcing its competitive position in the industry.
Looking ahead, RTX projects continued expansion in 2025, with expected sales growth of 4% to 6%. The company also guides for adjusted EPS to grow by 4.7% to 7.3%, reflecting operational efficiencies and a strong backlog. Moreover, RTX expects its FCF to increase to a range of $7.0 to $7.5 billion, compared to $4.5 billion in 2024.
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Profit Propulsion
RTX’s exceptional cash-generation capabilities enabled the company to return $3.7 billion to shareholders in 2024 through dividends and share repurchases, underscoring its commitment to shareholder value.
RTX has been paying and consistently increasing dividends for the last 27 years, which grants it a status of Dividend Aristocrat. While this yield is modest compared to some high-yielding stocks, it aligns with industry standards. The company’s strong cash position and moderate payout ratio support analysts’ projections of continued dividend growth at an annual rate of approximately 6-7% in the coming years.
In October 2023, RTX Corporation’s Board of Directors authorized a $10 billion share repurchase program. The program was completed through an Accelerated Share Repurchase (ASR) agreement, rather than open-market purchases. Although the ASR repurchase doesn’t offer the same ongoing price support as open-market repurchases, it front-loads the buyback’s impact, with banks gradually buying shares over time to mitigate supply and potentially support share price appreciation.
However, it seems that RTX doesn’t need to support its stock, as its performance has been strong and is expected to continue to reward investors. Several major brokerages – including Bank of America Securities, Wells Fargo, Morgan Stanley, and others – have raised their price targets on the stock in the past month. Consensus now implies nearly 15% upside, even after a 45% rally over the past 12 months.
Despite this outperformance, RTX remains attractively valued. While it trades at a premium to the broader Industrial sector and some industry peers, this reflects its superior revenue and EPS growth, higher total shareholder returns, and capital efficiency, as well as its robust stock performance, second only to GE Aerospace (a Portfolio holding). Additionally, based on discounted cash flow models, RTX appears undervalued by about 15%.
Overall, RTX’s financial strategies and market performance highlight its dedication to delivering value to shareholders while maintaining a strong position in the aerospace and defense industries.
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Investing Takeaway
RTX Corporation is a leading aerospace and defense company with a diversified business spanning commercial aviation, defense systems, and space technologies. Its innovation-driven model, backed by strong government contracts and advanced engineering capabilities, supports steady growth and market leadership. While defense remains a core revenue driver, commercial aerospace and aftermarket services provide balance and resilience. RTX’s disciplined capital allocation, including consistent dividend increases and strategic share repurchases, underscores its commitment to shareholder returns. With a robust backlog, strong cash flow generation, and sustained investment in next-generation technologies, RTX is well-positioned for long-term earnings growth and market expansion, making it a compelling investment opportunity in the aerospace and defense sector.
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New Sell 1: Reinsurance Group of America (RGA)
Reinsurance Group of America, Inc. engages in the provision of traditional and non-traditional life and health reinsurance products. RGA’s services include underwriting expertise, risk assessment, and specialized solutions tailored to life and health insurance markets.
With a market capitalization exceeding $14 billion and annual revenues of approximately $22.1 billion, RGA ranks #223 on the Fortune 500 list. The company has demonstrated strong fundamentals, evidenced by consistent business and premium growth. RGA returns capital to shareholders through dividends and strategic stock buybacks.
Despite these strengths, the current market environment is unforgiving toward companies that fail to meet analyst expectations. RGA experienced a notable stock decline after missing revenue and earnings projections in Q4 2024.
In Q4, RGA reported adjusted operating income of $4.99 per diluted share, below the consensus estimate of $5.24. Net premiums totaled $4.16 billion, missing the anticipated $4.24 billion. Total revenues were $5.24 billion, short of the expected $5.46 billion. However, net investment income exceeded expectations, mitigating some of the earnings shortfall.
For the full year, revenues increased by 19% from 2023, reaching $22.1 billion. Net income declined by 21% to $717 million, primarily due to increased costs and compressed profit margins. Profit margins decreased to 3.2% from the previous year’s 4.9%, largely because the cost of sales accounted for 88% of total revenue. Although adjusted operating income, excluding notable items, reached a record high – reflecting underlying operational strength – the more standardized adjusted operating earnings per share remained relatively flat compared to the prior year.
On a positive note, in 2024, RGA deployed a record $1.7 billion into in-force block transactions, acquiring existing insurance policies from other insurers. This marks an 80% increase over its previous record. These transactions are expected to drive future earnings growth through increased fee and investment income, expansion of recurring revenues, and operational efficiencies.
If RGA effectively manages associated risks, these deals should enhance ROE and EPS growth over time. However, the benefits are anticipated to materialize later this year and beyond. In the near term, integration costs may pressure margins, negatively impacting stock performance. Given current market volatility and elevated uncertainty, we have decided to remove RGA from the Portfolio for now but will consider reentry as conditions improve.
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New Sell 2: KKR & Co (KKR)
KKR & Co., Inc. is a global investment firm specializing in alternative asset management, capital markets, and insurance solutions. It manages assets across a diverse range of investment funds and accounts, covering multiple asset classes such as private equity, leveraged buyouts, real estate, infrastructure, and credit.
KKR is the world’s second-largest private equity firm after Blackstone and maintains a strong financial profile, with a proven track record of asset growth and rising fee-related earnings. The company also rewards shareholders through dividends and buybacks, and its market capitalization surged last year, securing its inclusion in the S&P 500.
However, KKR’s stock has come under pressure in recent weeks, despite delivering strong Q4 results. The company surpassed analyst expectations on overall revenue and EPS, achieving year-over-year growth in fee-related earnings, total operating income, and adjusted net income. However, AUM growth of 15% year-over-year fell short of analyst projections, raising concerns among investors. Additionally, most key metrics declined sequentially from Q3 to Q4, mirroring similar trends in other asset management firms that have reported earnings.
Analysts reacted with mixed views, some highlighted rising expenses, prompting a few brokerages to slightly reduce price targets, while others maintained a bullish long-term outlook. Despite this, KKR increased its dividend, signaling confidence in its business fundamentals. Nonetheless, market conditions remain unforgiving toward companies that fail to surpass all expectations.
A far stronger reason to consider selling KKR, however, is President Trump’s proposal to eliminate the carried interest tax loophole. This loophole allows private equity fund managers to pay capital gains tax rates (~20%) instead of ordinary income tax rates (up to 37%) on their performance-based earnings.
While KKR itself wouldn’t be directly affected – since it is structured as a corporation and pays the standard 21% corporate tax rate – its investment professionals, partners, and senior executives would likely face higher taxes on their compensation. This could force KKR to shift more compensation toward salaries and bonuses or restructure its funds, potentially affecting profitability, incentive structures, and talent retention.
The extent of this impact remains uncertain, as the proposal still requires legislative approval and could undergo modifications. However, with markets in flux, even minor uncertainty can weigh on a stock. Therefore, we believe it is prudent to sell the stock for now though we plan on revisiting KKR once regulatory clarity improves.
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New Sell 3: Micron Technology, Inc. (MU)
Micron Technology, Inc. is an American multinational corporation that designs, develops, and manufactures memory and storage solutions used across various industries, including computing, automotive, mobile, and data centers. MU is one of the global leaders in semiconductor memory technologies, producing high-performance DRAM, NAND, and NOR products that power next-generation computing and data storage applications.
Micron was added to the Portfolio in January, when its stock was on a strong upswing and its prospects seemed brighter than ever. Although its earnings call reflected cautious outlook amid softening demand across key consumer and industrial markets, the company projected strong optimism regarding its AI-driven data center growth. MU reported that its data center business now accounts for over half of its total sales, with an impressive 400% year-over-year revenue increase in this segment.
However, a reality check did not confirm analysts’ and our expectations. MU was hit hard by the DeepSeek rout and suffered an additional sell-off after President Trump threatened to slap tariffs on several U.S. trading partners. Although Micron fell along with other hardware and infrastructure stocks, its losses were more pronounced, as the stock appears to be experiencing negative market momentum.
Currently, high market volatility and elevated uncertainty around trade policy are amplifying risks. The new U.S. tariffs on China are expected to disrupt semiconductor supply chains, while uncertainty surrounding the CHIPS Act under the Trump’s administration raises concerns over potential delays or modifications to Micron’s expected $6.165 billion in direct federal funding. While not officially in jeopardy, slow disbursement and shifting political priorities are now casting doubt on its timeline.
While Micron’s long-term investment case remains intact, we acknowledge that our entry timing was unfortunate. We intend to reassess MU once there is greater policy clarity, but at this time, we believe selling the stock is the prudent course of action.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The Winners’ ranks have shrunk this past week as we sold KKR, while a drop in AMZN pushed it slightly below the 30% threshold. Now, our exclusive club includes 13 stocks: GE, AVGO, ANET, TPL, TSM, ORCL, EME, HWM, IBKR, PH, APH, ITT, and CRM.
The first contender is now AMZN with a gain of 29.64% since purchase, followed by IBM with a gain of 21.14%. Will one of them close the gap, or will another stock outrun them to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
