A Bernstein analyst recently raised the company's price target on RTX (NYSE: RTX) stock to $120 from $115 and maintained a "market perform" rating. The analyst notes that the aerospace and defense stock has had a strong run recently in line with the defense sector.

Moreover, on the commercial aerospace side, management's affirmation that the geared turbofan (GTF) removals and inspections for possible defects are on track helps to de-risk the stock.

Are the price target and rating justified?

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

The Bernstein view makes perfect sense. As previously discussed, RTX's valuation (it trades at slightly more than 20 times estimated 2025 earnings) is starting to look a little stretched. It also reflects the good news over the GTF inspections issue on the commercial aerospace side.

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

Defense contractors continue to face margin challenges

There's no problem with medium-term demand, not least due to the replenishment of equipment sent to conflicts overseas and heightened geopolitical tensions that are encouraging defense orders across the globe.

Still, as Lockheed Martin management recently noted, its international defense sales tend to come with margins similar to U.S. government margins "because they're under the same contracting regime." That's an issue because the U.S. government appears to be getting better at pressuring defense contractor's margins by insisting on fixed-price contracts.

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