RTX's $2.8 Billion F135 Contract: A Catalyst for Long-Term Margin Expansion and Geopolitical Resilience

The recent award of a $2.88 billion contract modification for the production of F135 propulsion systems to RTX's Pratt & Whitney division marks a pivotal moment for the aerospace and defense giant. This contract, part of the F-35 Joint Strike Fighter program, not only reinforces RTX's dominance in the defense industrial base but also positions the company to capitalize on a confluence of long-term tailwinds: rising global defense spending, geopolitical instability, and the structural advantages of its high-margin military business. For investors, the deal offers a compelling case for enhanced earnings visibility and a re-rating of RTX's stock valuation in a world increasingly defined by strategic competition.

Defense Industrial Base Strength: A Strategic Moat

The F135 engine is the beating heart of the F-35, a platform that has become the cornerstone of U.S. and allied air superiority. With over 1,300 engines delivered and 900,000 flight hours logged, the program's operational track record is unmatched. The new contract, which includes both cost-plus-incentive-fee and fixed-price-incentive-fee structures, ensures RTX's continued leadership in propulsion technology while balancing risk and reward. This dual-structure model is critical: it allows for flexibility in managing production complexities while incentivizing efficiency, a rare combination in defense contracting.

RTX's industrial base is further fortified by its sprawling network of U.S. and international facilities, from East Hartford, Connecticut, to Rocky Mountain, North Carolina. These sites are not just manufacturing hubs but innovation centers, supporting everything from long-lead material procurement to advanced engine core upgrades (ECU). The ECU program alone, valued at $1.3 billion, is a forward-looking investment in durability and performance, ensuring the F135 remains relevant through the Block 4 and beyond iterations of the F-35. This technological depth creates a formidable barrier to entry for competitors, cementing RTX's role as a critical node in the global defense supply chain.

Earnings Visibility and Margin Expansion

The F135 contract's multi-year duration (through February 2028) and its integration into a $92 billion defense backlog provide a rare level of earnings visibility in an otherwise volatile market. For context, RTX's Q2 2025 results highlighted a 13% increase in adjusted operating profit for Pratt & Whitney, driven by military programs like the F135. The division's ability to scale production while maintaining profitability—despite a $100 million charge from a customer bankruptcy—demonstrates operational resilience.

Historically, RTX has shown a strong correlation between earnings beats and positive stock performance. For instance, in Q2 2025, when RTX reported an EPS of $1.16 (exceeding the $1.10 forecast), its stock price rose by 0.31% to $86.29 within the following trading session. This pattern aligns with broader trends: over the past three years, RTX has beaten earnings expectations in 70% of its reporting periods, with an average post-earnings price increase of 1.2% over the subsequent five days. Such consistency reinforces the reliability of its earnings visibility, particularly in a sector where geopolitical risks often create volatility.

The contract's financial structure also hints at margin expansion potential. Fixed-price-incentive-fee components, which reward efficiency, could drive cost discipline, while the cost-plus elements provide a buffer against unforeseen challenges. This balance is particularly valuable in a rising geopolitical risk environment, where supply chain disruptions and production delays are inevitable. By diversifying its risk profile, RTX can protect margins even as it scales output to meet the demands of Lot 18 and beyond.

Geopolitical Resilience: A Tailwind for Defense Stocks

As global tensions escalate—from the Indo-Pacific to Eastern Europe—the F-35 program has become a linchpin of U.S. military strategy. The F135's role in powering these jets ensures that RTX's fortunes are tied to the enduring demand for fifth-generation airpower. This is not just a U.S. story: international partners and foreign military sales (FMS) customers account for a significant portion of the F-35 fleet, spreading risk and amplifying growth potential.

In this context, defense contractors like RTX are increasingly viewed as safe havens for capital. Unlike cyclical sectors, defense spending is often insulated from economic downturns and driven by strategic imperatives. The U.S. Congress's bipartisan support for the F-35 program, including advocacy from figures like Sen. Susan Collins and Rep. Rosa DeLauro, underscores its political durability. For investors, this means RTX's revenue streams are less susceptible to short-term volatility and more aligned with long-term national security priorities.

Valuation Implications and Investment Considerations

RTX's stock has historically traded at a discount to its intrinsic value, partly due to the cyclical nature of its commercial aviation business. However, the defense segment's growing contribution to earnings—now over 40% of total revenue—presents a compelling re-rating opportunity. With a $236 billion total backlog and a defense segment operating margin of ~12% (as of Q2 2025), the company is well-positioned to outperform in a high-geopolitical-risk environment.

Investors should also consider the broader macroeconomic backdrop. Rising interest rates and inflation have traditionally pressured defense stocks, but RTX's long-term contracts and inflation-linked pricing mechanisms mitigate these risks. The company's recent tariff-related adjustments and supply chain diversification further enhance its resilience.

Conclusion: A Strategic Buy for the Long-Term

The $2.88 billion F135 contract is more than a revenue line item—it is a testament to RTX's industrial might and its alignment with the defense sector's most critical needs. In a world where geopolitical risks are no longer tail events but baseline conditions, companies with robust industrial bases and high-margin military exposure are poised to outperform. RTX's combination of earnings visibility, margin expansion potential, and geopolitical tailwinds makes it a compelling long-term investment. For those seeking resilience in uncertain times, the F135 engine is not just powering fighter jets—it's fueling a new era of defense industrial strength.
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