LMT, GD and RTX: Value, Quality and Pairs Trade Opportunities Compared

The U.S. aerospace and defense sector has entered a period of unusually strong demand, but investors are not valuing every defense contractor in the same way.

Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD) and RTX (NYSE: RTX) all have large government and defense businesses, yet their earnings drivers are quite different. Lockheed is heavily exposed to missiles, aircraft and advanced defense systems; General Dynamics combines defense with business aviation; while RTX has a broader mix spanning Raytheon defense, Collins Aerospace and Pratt & Whitney commercial aerospace.

That makes the three stocks useful for a comparison based on valuation, business quality, growth visibility and relative-value or pairs-trade structures.

As of the September 29, 2026 close, LMT traded at $512.21 and RTX at $186.94, while GD was around the low-$330s after a recent pullback. LMT and GD were trading around roughly 20x trailing earnings, whereas RTX carried a materially higher trailing multiple of about 33x, according to market valuation data.

The difference is important because RTX is being valued partly for a different earnings profile rather than simply for defense exposure.

LMT: Large Backlog and a Strong Missile-Defense Cycle

Lockheed Martin's latest results showed a significant improvement from the unusually difficult comparison period of 2025.

Second-quarter 2026 sales increased 11% to $20.1 billion, while net earnings reached $1.8 billion, or $7.94 per diluted share. Free cash flow was $2.9 billion, and total backlog reached a record $230.4 billion.

The composition of that backlog is particularly relevant.

Lockheed's Missiles and Fire Control business generated second-quarter sales of $4.1 billion, up 19% year over year. The company attributed much of that growth to production ramps for integrated air and missile-defense programs including PAC-3 and THAAD.

That demand has received another boost from U.S. procurement. In July, the U.S. Army awarded Lockheed a contract worth up to $58.6 billion for PAC-3 MSE Patriot interceptor production, with the program extending through fiscal 2032.

Lockheed also raised its 2026 outlook. The company now expects sales of approximately $79.75 billion to $81.75 billion and free cash flow of roughly $7.0 billion to $7.2 billion.

The valuation question is therefore less about whether Lockheed has demand and more about how much of that demand is already reflected in the share price.

GD: A Different Mix of Defense and Aerospace

General Dynamics offers a somewhat different risk profile.

Its portfolio includes Gulfstream business jets alongside defense operations such as Marine Systems, Combat Systems and Technologies.

Second-quarter 2026 revenue increased 8.1% to $14.1 billion, while diluted EPS rose 13.4% to $4.24. Operating margin expanded to 10.4%.

The company's order flow was also strong. General Dynamics booked $20 billion of orders during the quarter, producing a company-wide 1.4-to-1 book-to-bill ratio. A book-to-bill ratio above 1 means new orders exceeded revenue recognized during the period.

Backlog ended the quarter at $136.5 billion, with another $50.4 billion of estimated potential contract value from unfunded IDIQ contracts and unexercised options.

That provides considerable revenue visibility.

At around 20x trailing earnings, GD's valuation is broadly similar to LMT's and below RTX's multiple. However, investors should not automatically interpret that difference as a simple discount. GD's earnings mix, exposure to Gulfstream and shipbuilding, and growth expectations are different from those of both LMT and RTX.

RTX: Higher Multiple, but More Commercial-Aerospace Exposure

RTX stands apart from the other two companies because its growth story is not exclusively dependent on government defense budgets.

Its Collins Aerospace and Pratt & Whitney businesses give the company significant exposure to commercial aircraft production and aftermarket services, while Raytheon provides its defense exposure.

Second-quarter 2026 sales increased 14% to $24.7 billion, with organic sales growth of 16%. Adjusted EPS increased 21% to $1.89, while free cash flow reached $2.9 billion. RTX's backlog was $289 billion, including $170 billion from commercial aerospace and $119 billion from defense.

RTX also raised its full-year 2026 guidance. Adjusted sales are now expected at $95 billion to $96 billion, adjusted EPS at $7.10 to $7.25, and free cash flow at $8.50 billion to $8.75 billion.

The commercial exposure helps explain why RTX trades at a higher valuation.

Investors are not paying solely for missile and defense demand. They are also valuing exposure to aircraft production, engine aftermarket revenue and a large installed commercial aerospace base.

Valuation Comparison

A snapshot around September 29 shows a meaningful valuation gap:

The valuation figures are market-data snapshots and can change with share prices and earnings estimates.

This creates three different valuation narratives.

LMT: a relatively moderate earnings multiple combined with a very large defense backlog and growing missile-defense exposure.

GD: a similar multiple to LMT, with a diversified portfolio and strong order generation.

RTX: a higher multiple that reflects stronger recent growth and significant commercial aerospace exposure.

The key question is therefore not simply which stock has the lowest P/E. It is whether future earnings growth justifies the premium investors are paying.

Where the Pairs-Trade Idea Comes From

A pairs trade involves taking a long position in one stock and a short position in another with the objective of reducing exposure to the overall sector or market.

For example, an investor might construct a hypothetical long LMT / short RTX trade if the thesis is that the valuation gap between the two companies is too wide relative to their future earnings trajectories.

Another possible structure is long GD / short RTX, based on the difference between GD's roughly 20x trailing multiple and RTX's roughly 33x multiple.

Conversely, an investor who believes RTX's commercial aerospace growth deserves its premium could construct the opposite relative-value exposure.

The important point is that a pairs trade is not simply a bet that one stock will rise and another will fall. The thesis is usually about relative performance.

If both stocks decline but the short position declines more, the trade can still produce a positive relative result. The reverse is also true.

Why Pairs Trades Can Go Wrong

The biggest risk is assuming that valuation differences must eventually disappear.

They may not.

RTX's higher multiple could remain justified if commercial aerospace recovery, aftermarket demand and Raytheon growth produce stronger earnings expansion than expected.

Likewise, LMT or GD could deserve different multiples because their business mixes, margins, contract structures and capital requirements differ.

There is also basis risk — the possibility that two stocks that appear economically similar respond very differently to company-specific developments.

For example, a major commercial-aircraft delivery cycle could disproportionately benefit RTX, while a large missile-defense procurement increase could have a different impact on LMT.

That means a sector pair is never a pure hedge.

What Could Change the Relative Valuations?

Several catalysts could influence the spread between LMT, GD and RTX over the next few quarters.

For LMT, investors should watch PAC-3 and THAAD production ramps, F-35 volumes, backlog conversion and free cash flow.

For GD, the focus should include Gulfstream deliveries, shipbuilding execution, defense orders and margins.

For RTX, commercial aircraft production, aftermarket demand, Pratt & Whitney execution, Raytheon missile production and free cash flow are particularly important.

RTX's defense position has also received a near-term boost from a provisional $20.7 billion multiyear AMRAAM missile contract announced by the Pentagon in September. Reuters reported that the contract is intended to accelerate production as U.S. and allied missile inventories face pressure.

The contract highlights a broader theme affecting all three companies: demand is rising, but converting that demand into earnings depends on manufacturing capacity, labor, supply chains and government funding.

Quality Versus Value: What Investors Should Measure

Looking beyond P/E ratios is essential.

Investors comparing these defense stocks should track:

• Backlog: how much future revenue is already contracted.

• Book-to-bill: whether new orders are exceeding current revenue.

• Free cash flow: how much cash remains after capital spending.

• Operating margins: whether additional sales translate into profits.

• Return on capital: how efficiently the companies use shareholder and debt capital.

• Earnings growth: whether valuation is supported by expanding profits.

• Business mix: defense exposure versus commercial aerospace.

• Program execution: whether large contracts are delivered profitably.

The distinction between value and quality is particularly important here. A lower P/E does not automatically indicate a superior investment opportunity, while a higher P/E does not automatically indicate overvaluation.

The market is ultimately pricing future cash flows, not just the current earnings multiple.

Investor Takeaway

LMT, GD and RTX provide three different ways to gain exposure to the U.S. aerospace and defense cycle.

Lockheed combines a large defense backlog with accelerating missile-defense production. General Dynamics combines defense visibility with a substantial business-aviation operation and strong order activity. RTX commands a higher valuation but has a broader commercial-aerospace earnings engine alongside its Raytheon defense business.

The valuation gap makes the group interesting for relative-value analysis, particularly because LMT and GD trade at considerably lower earnings multiples than RTX. But the difference also reflects genuine differences in business mix and expected growth.

For investors studying a pairs-trade approach, the critical variables are earnings growth, valuation convergence, backlog conversion and cash-flow delivery, rather than simply choosing the stock with the lowest P/E.

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This article is for informational and educational purposes only and should not be considered investment advice