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RTX (RTX 1.24%) stock has been on a downward trend since the company outlined the expected financial consequences of issues with one of its most popular aircraft engines. After the decline some investors might be thinking this is a buying opportunity, but at least one Wall Street analyst is warning against it.
RTX, which until recently was known as Raytheon Technologies, has a massive array of defense and commercial aerospace businesses including Pratt & Whitney jet engines. In July, the company discovered a problem with its PW1100G-JM engine that powers the Airbus A320neo, and this week revealed that the issues would lead to billions in charges and lost free cash flow.
Shares of RTX are now down 14% over the past 30 days, and 28% below their highs for the year. RTX is an established company with the wherewithal to get past this crisis, which has led to some suggestions that this slump could be a buying opportunity.
Bank of America urges caution. On Thursday, analyst Ronald Epstein downgraded RTX to underperform from neutral and cut his price target to $75, from $95. Epstein wrote that while some might think RTX is a value play following its decline, the firm sees "significant near-term risks" and expects RTX to continue to underperform until there is more clarity about the extent of the engine mess and how long it will take to fix it.
There is still a glimmer of hope for long-term-focused investors. RTX''s missile business should do well in the quarters to come as the Pentagon restocks and focuses on assistance to Ukraine, and the U.S. and European allies build their focus on defense in response to Russia''s aggression.
On the commercial side, the company''s Collins Aerospace business is performing well, according to Epstein, and should help to at least soften the blow from the Pratt & Whitney charges. For those who are willing to buckle up and face what could be months and months of continued headwinds due to the engine issue, now could indeed be a buying opportunity.
But even after the financial disclosures this week, investors won''t fully know the extent of the charges and the long-term reputational damage done to RTX and Pratt & Whitney until long after this ordeal is over. Given the uncertainty, RTX shares are finding it hard to gain altitude.
Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends RTX. The Motley Fool has a disclosure policy.
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RTX (RTX 1.24%), the company that until recently was known as Raytheon Technologies, beat quarterly estimates and narrowed its guidance for the full year. But investors were more focused on weak free cash flow and issues at its all-important Pratt & Whitney engine unit.
Shares of RTX fell by as much as 16% on Tuesday due to the uncertainty that came out of the release.
RTX has been in transition for a few years now. Raytheon Technologies was formed by the 2020 merger of defense specialist Raytheon and the aerospace arm of the former United Technologies, with the goal of offering a wide range of defense and commercial aerospace goods including Pratt & Whitney engines and Collins interiors.
The integration has gone largely to script, but the company now faces headwinds concerning one of its most important products. RTX informed investors that Pratt & Whitney has determined that "a rare condition in powder metal" used to manufacture certain engine parts will require inspection.
The company warned that "a significant portion" of the PW1100G-JM engine fleet, which powers the popular Airbus A320neo, will require accelerated removals and inspections within the next nine to 12 months.
That will cost money, and as a result RTX lowered its free-cash-flow outlook for the year by 76% to $193 million.
The engine is a significant part of the overall expense of buying a new plane, and Pratt & Whitney is in a constant battle with rivals including General Electric to secure a place on top-selling platforms like the A320. The issue is a near-term cash drain and could be a long-term reputational risk if Pratt & Whitney is not able to resolve it quickly.
Overall, the quarter was solid but not spectacular, reflecting strong demand for munitions on the defense side and aircraft interiors on the commercial side. There''s a lot of potential here, but investors are understandably taking a cautious approach until more is known about this engine issue.
Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Rtx. The Motley Fool has a disclosure policy.
BREAKING: Dow, S&P 500 Have Best Month In A Year
Defense giant RTX (RTX), formerly Raytheon Technologies, topped expectations for its Q2 report early Tuesday. RTX stock tumbled following results as its Pratt & Whitney jet engine unit disclosed a defect.
Meanwhile, the Senate passed its version of the defense spending bill late Thursday.
The missile and F-35 jet fighter components maker, which recently changed its name from Raytheon Technologies, reports after rival Lockheed Martin (LMT) topped estimates for its Q2 results last week.
RTX adjusted earnings increased 11.2% to $1.29 per share. Earnings including acquisition accounting adjustments and non-recurring charges rose 2% to 90 cents per share. Sales surged 12% to $18.3 billion, with 12% revenue growth across all business segments.
Analysts expected RTX earnings growth to decelerate for the second quarter in a row, ticking up 1.7% to $1.18 per share on 8.3% revenue growth to $17.68 billion.
Collins Aerospace sales surged 17% to $5.85 billion, driven by a 29% increase in commercial aftermarket orders. Pratt & Whitney sales increased 15% to $5.7 billion. Wall Street saw revenue for both segments rising to $5.63 billion.
The company disclosed it discovered a manufacturing defect in its Pratt & Whitney unit from a rare condition in powered metal used to make certain engine parts, which will require "accelerated fleet inspection." The defect does not impact engines currently in production, but a "significant portion" of the PW1100G-JM engine fleet will require removals and inspections in the next nine to 12 months. The PW1100G-JM engines power the A32neo commercial planes made by Airbus. RTX estimates roughly 200 accelerated removals will be required by mid-September this year.
The initial assessment over the next several weeks is expected to reduce free cash flow by $500 million, and another 1,000 engines will require inspection this year, the Wall Street Journal reported.
Raytheon Intelligence & Space sales edged up 2% to $3.66 billion while Raytheon Missiles & Defense sales jumped 12% to $4 billion. The Raytheon Intelligence & Space and Raytheon Missiles & Defense businesses will merge under the Raytheon name in the second half of the year as part of a reorganization announced in January.
RTX''s Q2 backlog was $185 billion, with $112 billion from commercial aerospace orders and $73 billion from defense.
RTX narrowed its outlook for the year. The defense contractor forecasts adjusted earnings between $4.95 to $5.05 per share on $73 billion to $74 billion in sales. RTX previously guided earnings between $4.90 and $5.05 per share on $72 billion to $73 billion in revenue. The company lowered its free cash flow estimate to $4.3 billion from $4.8 billion, due to the engine defect.
For the year, analysts polled by FactSet see earnings rising 5% to $5.02 per share on 8.5% revenue growth to $72.7 billion.
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