RTX's forecast lift is a capacity story: $37 billion of Tomahawk and AMRAAM orders meet three bottlenecks

This was the third guidance revision of 2026, and the pattern matters more than any single quarter. The January opening guide implied roughly5–6% organic sales growth; by October the company was guiding to 10–11% organic growth with adjusted sales $4.5 billion higher at the midpoint. Adjusted EPS guidance rose $1.00 over the same stretch, from $6.60–$6.80 to $7.65–$7.75. Each raise added more earnings than sales — roughly $1.35 billion of adjusted earnings on $4.5 billion of extra revenue, an implied incremental margin close to 30% against a company net margin near 10%.

That 30% implied incremental margin is the number the bull case rests on, and it is the number capacity investment threatens. A price increase or a mix shift drops through at high margin. A production ramp does not: it arrives with tooling, test equipment, new suppliers, scrap, overtime and a working-capital build that has to be funded before the parts ship.

The mechanism behind the margin question is contractual. Revenue on these programs is recognised as costs are charged to the contract, so a ramp pulls in cash and cost before it pulls in profit. That is why the same quarter produced a 33% jump in adjusted EPS and a 46% fall in free cash flow. Revenue follows the spend, not the order, and the spend for a 2x–4x rate increase runs ahead of the revenue it eventually produces.

Tomahawk and AMRAAM together account for $37.3 billion of the $52.3 billion Raytheon booked in the quarter, and they are precisely the two families management tied to 2x–4x rate increases. Behind them the restock is broad — $3.7 billion of Patriot GEM-T for Ukraine, $1.1 billion of AIM-9X Block II, $0.8 billion each for ESSM and LTAMDS, plus $5.7 billion of classified contracts in the first nine months alone. Raytheon's $130 billion backlog covers roughly four years of sales at the current run rate. The shop floor, not the order book, is the constraint on what any of this becomes in 2027 and 2028.

This is the most under-read fact of the quarter. When a constraint is physical and takes years to build, the customer eventually funds it, and the funding shows up as government capital rather than prime capital spending. RTX's own capital spending barely moved: nine-month capital expenditure was $2.12 billion against $2.00 billion a year earlier, up about 6%, while guidance implies a 2x–4x rate increase. Customers are paying for capacity RTX is not buying, which protects near-term cash but caps margin, because a prime paid to build for a customer captures less of the value than a prime paid to deliver a higher price.

Earnings rose 35% and cash from operations fell 38% in the same quarter, and cash conversion halved to 1.1x net income from 2.3x. Part of the quarter's cash was not repeatable: management said $300 million of tariff recoveries were received in the third quarter with another $50 million expected in the fourth, after which those items are behind the company. Nine-month free cash flow of $6.15 billion is still 40% above the $4.40 billion of the same period in 2025, so the $9.0–$9.2 billion full-year guide holds — but it implies about $2.9–$3.1 billion in the fourth quarter after a $2.1 billion third quarter, and the working-capital build that a 2x–4x ramp requires is still ahead. Cash has stopped following earnings, and that is the cost of capacity becoming the constraint.

Raytheon's14.1% third-quarter margin was above its 13.0% nine-month margin, which is what fixed-cost absorption on rising volume looks like. But it still sat below Lockheed Martin's missile segment at 14.5% — even though Raytheon booked $52.3 billion in a single quarter and Lockheed's missile sales grew 19% year over year. The group-level picture needs a haircut as well: Pratt & Whitney's adjusted operating profit of $968 million sits $360 million above the $608 million it reported, and an implied incremental adjusted margin close to 30% on $2.5 billion of added quarterly sales is not a mix that repeats. The margin gain is real but flattering, because it is being read off a quarter that contained both a large add-back and a large tariff recovery.

This is not a chain of vendors but a scramble for the same three inputs, and the listed exposure to the restock sits mostly outside the prime. The motor suppliers now have government money behind them, the circuit board supplier is growing aerospace and defense revenue at 14% while spending cash to do it, and the actuation supplier is earning a 17.5% margin on content that scales with interceptor rates. The constraint is owned by the supplier chain, not the prime, which is the strongest argument for owning the constraint directly rather than the backlog headline.