Investors might want to bet RTTX 10.0 (NYSE:RTX) was recently upgraded to a Zacks Rank #2 (Buy), and this rating change fundamentally reflects an upward trend in earnings estimates, one of the most powerful factors impacting stock prices.
The only factor that determines the Zacks rating is the changing earnings picture for a company. The Zacks Consensus Estimate — the consensus of EPS estimates from the sell-side analysts covering the stock — is tracked by our system for the current and upcoming years.
The Zacks rating system is extremely useful to individual investors because changing earnings conditions are a powerful factor influencing near-term stock price movements. Since rating upgrades by Wall Street analysts are driven by subjective factors that are difficult to see or measure in real time, individual investors may find it difficult to make decisions based on rating upgrades.
As such, the Zacks rating upgrade for RTX is essentially a positive comment on the company’s earnings outlook and could have a positive impact on the stock price.
The most powerful forces affecting stock prices
Changes in a company’s future earnings power, as reflected in earnings forecast revisions, and the short-term price movement of that company’s stock have proven to be strongly correlated. The influence of institutional investors also partially contributes to this relationship. These large professionals use earnings and earnings forecasts to calculate the fair value of a company’s stock. An increase or decrease in earnings forecasts in their valuation models simply results in an increase or decrease in the fair value of the stock, and institutional investors typically buy or sell the stock. Their bulk investment behavior then leads to price movements in the stock.
For RTX, rising earnings expectations and the resulting rating upgrade fundamentally mean that the company’s underlying business is improving — and as investors value this improving trend, the stock price should rise.
Harnessing the power of earnings revisions
Empirical research shows a strong correlation between trends in earnings estimate revisions and near-term share price movements, so tracking such revisions to make investment decisions can be extremely beneficial. This is where the proven Zacks Rank stock rating system comes into play, as it effectively harnesses the power of earnings estimate revisions.
The Zacks Rank stock rating system uses four earnings estimate-related factors to categorize stocks into five groupings, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). This system has a proven, outside-audited track record of outperformance, and since 1988, Zacks Rank #1 stocks have generated an average annual return of +25%.
RTX earnings forecast revision
The aerospace and defense company is expected to post earnings per share of $5.39 for the fiscal year ending December 2024, which would represent an increase of 6.5% from the prior-year reported figure.
Analysts have been steadily increasing their estimates for RTX. Over the past three months, the company’s Zacks Consensus Estimate has increased 0.1%.
Conclusion
While Wall Street’s overly optimistic analyst rating system tends to be biased towards favorable recommendations, the Zacks rating system consistently maintains an equal number of “Buy” and “Sell” ratings across more than 4,000 stocks. Regardless of market conditions, only the top 5% of stocks covered by Zacks receive a “Strong Buy” rating, while the next 15% receive a “Buy” rating. Therefore, stocks ranked in the top 20% of stocks covered by Zacks indicate that the stock has strong earnings estimate revision capabilities and are solid candidates to generate market-beating earnings in the near term.
RTX’s upgrade to a Zacks Rank #2 puts the company in the top 20% of stocks covered by Zacks in terms of estimate revisions, suggesting the stock may be headed for higher growth in the near term.
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