Q1 2025 Quarterly Newsletter
The war in Iran has caused a significant disruption to global oil supply and has sent crude and commodity prices sharply higher. This interruption is the latest risk to economic stability in a periodic sequence of events, including the financial crisis of 2009, the global pandemic, the war in Ukraine, wars in the Middle East, tariffs and the unwinding of the international free trade order. In each of these episodes of instability, the U.S. economy has weathered these tempests relatively well with the stock market reaching new highs when the volatility subsided.
There are several structural attributes that make the U.S. economy more flexible and well positioned to rebound from periodic shocks, including those that are sometimes self-inflicted. To begin with, the U.S. economy generally has less regulation, a greater entrepreneurial culture, more pliable labor markets, energy independence, a currency that serves as the world’s reserve currency and stronger protections for intellectual capital and private property than competing economies.
These attributes have contributed historically to the U.S. outperforming other developed economies by a considerable degree. According to the World Bank, in the period 2008-2023, the European Union (EU) – which is currently made up of twenty-seven member countries – grew Gross Domestic Product (GDP) by 13.5%. The United Kingdom’s GDP increased by 15.4%. By comparison, the U.S. GDP rose by 87% (from $14.8 to $27.7 trillion). Adjusting for population (on a per capita basis), EU GDP per capita as a percentage of U.S. GDP per capita fell from 76% in 2008 to 50% in 2023.
The Federal Reserve System, through its tools to influence short-term interest rates, also acts as a moderating influence on periodic shocks to the economy. Part of this success is based on the Fed’s independence and its diligent focus on its dual mandate of promoting strong employment and price stability to maintain low inflation.
Recently, there has been some concern about the Fed’s independence with current Chairman Jerome Powell’s term ending in May 2026. Most Presidents have attempted to influence the Fed by demanding lower interest rates, particularly during an election season. Despite elevated pressure from this administration, the current Chair enjoys deep bi-partisan support, and the courts have dismissed legal maneuvers that have been seen as attempts to influence Fed decision making.
The Fed is structurally well designed to withstand political pressure. The Chair of the Federal Reserve serves a four-year term in which the individual can be reappointed for multiple consecutive four-year terms if confirmed by the Senate. The Chair must also be a member of the Federal Reserve Board of Governors, where members serve a separate fourteen-year term. If a successor is not confirmed by the end of a four-year term, the incumbent Chair can continue serving until a successor is nominated and confirmed. The Fed Governors’ fourteen-year terms are staggered; one term expires every two years. The President and Senate have no say in selecting individual presidents of the twelve regional Fed banks. They are chosen by the banks’ private sector boards of directors, subject to the approval of the Fed Board of Governors in Washington, DC.
The Fed sets interest rates through a twelve-member committee that draws from two different pools: seven members from the Board of Governors and a rotation of five of the system’s twelve regional bank presidents. All nineteen committee members participate in the policy discussion, but only twelve vote.
The conflict in Iran is likely to reinforce the sentiment for holding rates steady. To be sure, the war’s effect on energy markets has made the Fed’s job more challenging. The longer the war, the greater the possibility of higher inflation and weaker growth. However, assuming the disruption is temporary, a survey of economists produced a consensus that the probability of a recession is only up modestly in the next twelve months given the resilience of the U.S. economy.
Past dislocations to the economy, including pandemic shutdowns, housing crises, wars and global trade disputes, have not prevented the U.S. economy from subsequently growing or the stock market from reaching new highs. The U.S. economy’s inherent strengths and a strong nonpartisan central bank portend well for current and future economic challenges that, in reality, are the norm.
Company Comments
Comments follow regarding common stocks of interest to clients with stock portfolios managed by Delta Asset Management. This commentary is not a recommendation to purchase or sell but a summary of Delta’s review during the quarter.
Microsoft Corporation {MSFT}
Founded in 1975, Microsoft is the world’s largest independent software developer. The company has experienced a renaissance under the leadership of Satya Nadella. He is the third CEO in the company’s history. Since becoming CEO in February 2014, Microsoft has quickly emerged as one of the most important cloud computing firms in the world, having more than doubled its market share in the public cloud space over the past few years. Corporate America continues to adapt to the cloud’s efficiencies. Azure, the firm’s cloud offering, has established itself as the No. 2 player in the space behind Amazon.
Microsoft is not only a leading cloud infrastructure provider, but it also sells a multitude of software programs hosted on the cloud, which provides differentiation for Azure to exploit. These products include Windows operating systems, Office business solution applications, Enterprise Resource Planning and Customer Relationship Management applications, LinkedIn talent, marketing and sales solutions, video games and its online search offering Bing. We believe the benefits of cloud computing, such as efficiency, flexibility, scalability and cost savings, will continue to drive enterprises away from on-premises computing to the cloud. Microsoft is positioned to continue to lead in this transition due to its massive installed base of enterprise solutions that allow its customers to remain in the same Microsoft environment as they transition to the cloud.
Office, Microsoft’s productivity software, has been reinvigorated by the launch of a cloud-based subscription version known as Office 365. Around 1.5 billion workers globally use Office or Office 365 accessed through Azure. For mature businesses, such as Windows and Office, the company has moved from a transaction model to a subscription model, extending the lives of these businesses, expanding the market and setting the stage for a stronger recurring revenue structure. Updates and software fixes will be easier, and there will be a higher capture of revenue as leakage from piracy is reduced. Microsoft’s transformation into a cloud-based software company should allow it to lower its distribution costs and strengthen profitability while focusing on its strengths serving enterprise customers.
Microsoft’s cloud business faces diverse competition from companies, such as Amazon, Google and Oracle, as well as software-centric companies including Salesforce and VMware, Inc. As such, the company must continue to innovate even as it prolongs the life of its legacy products. Approximately one third of the company’s workforce of 221,000 is dedicated to research and development (R&D). The company continually adds capabilities to its cloud offerings, enterprise productivity software suite and gaming. Microsoft’s strategy is to apply innovations across its product portfolio where possible. Microsoft is expected to spend over $32 billion on R&D this year, a key differentiator for the company.
Microsoft has significantly increased its capital spending. It has invested over $1 billion in Artificial Intelligence (AI) and is a preferred partner of OpenAI. The company is already monetizing its artificial intelligence (AI) investment by embedding it in a number of its software applications and cloud services. Copilot is Microsoft’s chat box AI offering for its enterprise suite. In the most recent quarter, the company disclosed that purchased Copilot sets have reached 15 million. The adaptation of AI is still early and fluid. The company’s AI offering has some operability issues, and a number of competitive solutions are available.
Microsoft is acquisitive and does not shy away from making occasional large acquisitions. Its largest acquisition, Activision Blizzard, closed October 2023 for $69 billion. Microsoft is a leading game provider through its Xbox 360 console and owns some of the most popular games, such as Halo and Minecraft. The acquisition will significantly increase Microsoft’s gaming content offerings and help the company further transition to a digital cloud gaming provider, allowing gamers to stream across personal computers (PCs), consoles and mobile devices. Although competitive, the gaming market remains robust with three billion people actively playing games. Microsoft will continue to invest to improve its content and services to gain market share.
We anticipate that Microsoft will continue to internally develop and acquire a wide range of technologies and products while continuing to be a leading provider in fast-growing enterprise cloud computing. We expect its fast-growing businesses combined with its more mature business lines to lead to average revenue growth of approximately 13% over our 10-year modeling period. Based on our assumptions, our modeling indicates that at the current stock price Microsoft offers a potential long-term rate of return of approximately 11%.
RTX Corporation {RTX}
RTX is a leading aerospace and defense company formed through a merger between United Technologies’ aerospace businesses and Raytheon. The company maintains a balanced exposure to both commercial aviation and defense markets, which differentiates it from many peers that are more heavily concentrated in one of these markets. This diversification provides a degree of resilience across economic cycles while allowing RTX to benefit also from long-term growth trends in global air travel and defense spending.
The company operates through three primary segments: Collins Aerospace, Pratt & Whitney and Raytheon. Across these segments, RTX manufactures mission-critical systems, including aircraft components, jet engines and advanced defense technologies. These products are characterized by high engineering complexity, long development timelines and strict regulatory requirements. As a result, the industry is marked by significant barriers to entry, long-duration customer relationships and high switching costs. Additionally, RTX benefits from a “razor-and-blade” business model, where original equipment sales are followed by decades of higher-margin servicing and parts revenue.
In commercial aerospace, demand has largely recovered following the pandemic and continues to grow at a steady pace. However, aircraft production remains constrained due to supply chain bottlenecks across the industry. This constriction has resulted in aging fleets and increased utilization of existing aircraft, both of which support demand for maintenance and aftermarket services. RTX is well positioned to benefit from these dynamics, particularly through Collins Aerospace and Pratt & Whitney, as a growing installed base of narrowbody aircraft and engines drives recurring maintenance revenue over time.
Pratt & Whitney is working toward the resolution of its previously disclosed engine-related production issues regarding its Geared Turbofan (GTF) engine stemming from contamination in a key input – metal powder – which have created near-term operational headwinds. Due to the incident, the company has had to accelerate inspection and maintenance on affected engines. While this episode has impacted production and required incremental costs, the majority of these charges have already been recognized, and management expects full resolution by end of fiscal 2027. Importantly, the long-term opportunity remains unimpaired, as the company continues to build a large installed base of next-generation GTF engines that should generate meaningful aftermarket revenue for decades.
On the defense side, Raytheon is benefitting from a sustained global shift toward higher defense spending resulting from heightened geopolitical tensions and defensive autonomy objectives for European NATO countries. NATO budgets are rising, international contract activity remains strong and Raytheon’s backlog grew meaningfully in 2025 with a segment book-to-bill ratio above 1.4x. The segment participates across high-priority mission sets, including integrated air and missile defense, naval systems, precision munitions, advanced sensors and hypersonic missiles that are critical to national security. Key products such as Patriot defense system, RIM-7 Sea Sparrow, SM-6 and Tomahawk remain core growth drivers with decades-long relevance. Raytheon’s long product cycles, entrenched customer relationships and program-level monopolies reinforce high barriers to entry and support durable cash flow visibility.
RTX has consistently generated strong free cash flow (FCF), as evidenced by its 75% year-over-year FCF growth in 2025, supported by rising aftermarket revenue and disciplined capital allocation. This standing has enabled the company to position itself for superior long-term development. Management expects this trend to continue, allowing RTX to support its dividend, strengthen its balance sheet through debt repayment and pursue internal investment and strategic acquisitions.
Given its balanced business mix, strong competitive positioning and exposure to favorable long-term industry trends, we believe RTX is well positioned to deliver appealing growth over time. Strong demand across both commercial and defense end-markets, combined with ongoing efficiency initiatives and elevated backlog visibility, supports a solid outlook for mid-single-digit sales growth and stable profit margins. While near-term execution, particularly within the engine business, remains an area to monitor, the company’s durable business model and recurring revenue streams support an attractive long-term outlook. Based on these assumptions, our stock valuation model indicates RTX’s current stock price offers a long-term annual average rate of return of approximately 5%.
Intel Corporation {INTC}
NOTE: During the quarter we exited our position in our model portfolio.
Intel is a leading designer and manufacturer of microprocessors for the global PC and data center markets. The company supplies the computing industry with the chips, boards, systems and software that are the primary components of computer architecture. Intel pioneered the x86 architecture for microprocessors used in most PCs and data centers today. The company currently operates in two main business groups: its more mature Client Computing Group, which supplies chips for personal computing, and its Data Center and AI Groups, which includes the more advanced and faster growing computing segments such as Internet of Things (IoT), AI, automotive and 5G networks.
After decades of leadership in the design and manufacture of complex chips, Intel has developed important advantages, including manufacturing scale, broad product scope and intangible assets related to its advanced intellectual property. This scaling advantage is defended by higher-than-peer R&D and capital spending that enable the company to deliver a more predictable cadence of products that move, store and process data at a lower cost. Intel’s cost advantage is critical in a capital-intensive industry where large-scale manufacturing facilities, or foundries, cost $20 billion or more to build, creating significant barriers to entry.
Intel is facing challenges both cyclical and structural, such as demand weakness in PCs, increased competition and process manufacturing setbacks. Competition is Intel’s primary long-term challenge. Intel has a dominant share in PCs and x86-based servers, but recent delays in process upgrades have allowed its competitors to gain market share. In addition, some customers have begun to design their own chips to diversify their supply chain and have more control over major supply inputs. We believe the consolidated nature of the industry, limited chip manufacturing capacity globally and the years it takes to bring on new capacity make shifts in market share difficult. Intel is working through a multi-year strategic plan to regain its footing that requires substantial investments in R&D and infrastructure. Though progress has been good to date, the company continually faces execution risks amid heavy competition.
Long-term prospects for the semiconductor industry remain bright. Intel has a dominant position in the mature PC space, which has modest growth expectations, but the company continues to invest to advance the business. Gaming computers and consoles, both of which rely on x86 processors for speed and reliability, continue to be a growth driver for Intel. We expect Intel to continue to benefit from the growth in cloud computing and AI, which require huge data center buildouts, increasing chip demand. The digitalization of everything from the technology sectors to businesses, such as industrials, health care, finance and communications among others, creates increasing amounts of data that must be stored, analyzed and transmitted. Intel’s more mature, slow growing businesses will be relied upon to generate the free cash flow needed to invest in faster growing areas such as IoT, AI and 5G that are still in the early innings of their development.
Beyond chip advancements, Intel has launched Intel Foundry Services to manufacture chips for designers such as AMD, Amazon Web Services and Qualcomm. The company recently expanded a facility in Arizona and is developing a new facility in Ohio. Further, Intel recently acquired the remaining 50% of the facility in Ireland it did not already own. This potential new revenue stream will take years to fully develop while facing substantial execution and competitive risks, but it will grow Intel’s chip capacity in a time of increasing chip demand.
Based on the financial characteristics we have modeled, we assume that Intel can average mid-single-digit revenue growth over the next decade. At this pace of growth and given improved process efficiency against the competitive backdrop outlined above, we believe operating margins can average approximately 22% during the period. Based on our forecast assumptions, Intel’s current price exceeds our valuation estimate, therefore we exited our position.
Baxter International {BAX}
NOTE: During the quarter we exited our position in our model portfolio.
Baxter International provides a broad portfolio of essential hospital products. These include nutrition, IV solutions, surgical sets, infusion systems and devices, nutrition therapies, biosurgery products and inhaled anesthetics as well as digitally equipped medical beds, software and service technologies.
However, Baxter faces a number of challenges, including suboptimal capital allocation decisions by prior management. In 2021, Baxter purchased Hillrom, a company that makes digitally equipped hospital beds and operating room equipment. Hillrom’s products are commoditized and subject to pricing pressure from reimbursement decisions from hospitals from insurance and government programs. Baxter’s purchase price for Hillrom, including the assumption of outstanding debt obligations, was $12.5 billion, which increased the interest expense for the company.
In early 2025, the company received $3.4 billion in net proceeds from the sale of its kidney segment, most of which was deployed toward debt reduction. Historically, Baxter has repurchased its shares but has not been active in that regard due to allocating capital to reduced debt.
Baxter’s main challenges are increasing competition in its more commoditized offerings and continuing efforts on cost containment in the healthcare industry in general that may exert pricing pressure on medical products. In addition to government regulation, managed care organizations’ purchasing power has strengthened due to their consolidation into fewer, larger organizations with a growing number of enrolled patients. Quality control is also a risk factor. Product recalls, both voluntary and involuntary, can damage reputation among customers.
Although long-term we believe the company can generate revenue growth in the 3% range and operating margins approaching 14%, we believe there are other opportunities that are more compelling while Baxter focuses on deleveraging and right sizing its corporate structure.
March 31, 2026
Specific securities were included for illustrative purposes based upon a summary of our review during the most recent quarter. Individual portfolios will vary in their holdings over time in relation to others. Information on other individual holdings is available upon request. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Any projections are hypothetical in nature, do not reflect actual investment results and are not a guarantee of future results and are based upon certain assumptions subject to change as well as market conditions. Actual results may also vary to a material degree due to external factors beyond the scope and control of the projections and assumptions.