Aerospace giant RTX (RTX +0.95%) came into 2023 with a new name and considerable promise, but the company ran into some unexpected headwinds in the form of a massive engine recall.
The details leaked out slowly, and over time it became clear that the fix would be costly. Investors decided not to wait for a turnaround, sending the stock down as much as 35% for the year at its low.
The stock recovered somewhat in the final months of 2023, but it was still a year to forget for RTX investors. Shares of RTX ended down 16.6% in 2023, according to data provided by S&P Global Market Intelligence, losing to the S&P 500 by more than 40 percentage points.
A costly engine issue eats into profits
RTX, the commercial aerospace and defense giant that until 2023 was known as Raytheon Technologies, counts Pratt & Whitney (P&W) aircraft engines as one of its primary businesses. P&W is one of the world's largest producers of engines and is a cash-generating machine for RTX in good times, but the unit ran into trouble during the year.
In July, RTX disclosed issues with its PW1100G-JM engine that powers the Airbus A320neo that would require a costly fix.
The stock continued its plunge into September when RTX finally quantified the financial impact of the engine issue. The company said it needs to remove upwards of 700 engines for inspection over the next three years, a costly and time-consuming task that would require it to compensate airlines for the downtime.
Overall, RTX said it expects to book a pre-tax operating-profit charge of at least $3 billion related to the issue. The company also cut full-year sales guidance for 2023 and warned the engine issue would likely impact free cash flow through 2025.
NYSE: RTX
Key Data Points
Is RTX stock a buy heading into 2024?
The Pratt & Whitney mishap is a big blow to RTX, but it's far from fatal. The A320neo is one of the world's most popular airframes, and there is a long waiting list for engines, meaning there is little opportunity for customers to look elsewhere even if they want to. RTX is smart to work with airlines and to compensate them for their troubles, keeping long-term relationships in place.
Beyond Pratt & Whitney, RTX also has a massive Collins Aerospace commercial business, as well as a range of in-demand missiles, missile defense systems, and other defense products through its Raytheon unit. The company remains committed to returning upwards of $35 billion to shareholders through 2025 despite the P&W cash drain, a testament to the size and strength of this company.
The engine issues will take time to correct, but RTX appears to have the problem contained and under control. As investors see proof that RTX is getting Pratt & Whitney back on track, this stock is a good candidate for a bounce-back year in 2024.
