A Wall Street analyst believes aerospace and defense giant RTX (RTX -0.29%) is due for a rebound as the company addresses its engine issues. Investors are taking notice, sending RTX share up by as much as 2.7% on Thursday morning.
Headwinds are fading
2023 was a tough year for RTX, the aerospace and defense company formerly known as Raytheon Technologies. The company's Pratt & Whitney unit was hit by the discovery of a manufacturing issue with its workhorse PW1100G-JM turbofan engine. The problem, caused by impurities in a powder metal that was used to manufacture engine parts, could cause those parts to degrade faster than normal.
Planes have been grounded, and the engines are being inspected on an accelerated schedule to determine what repairs are needed, but addressing the issue will take at least a year, and cost RTX billions of dollars for fixes and customer compensation.
This has left RTX shares in the doldrums, but Wells Fargo analyst Matthew Akers sees a buying opportunity. He just raised his rating on RTX to overweight from equal weight, and boosted his price target on the stock to $120 from $100.
Akers thinks airplane groundings related to the engine issue will peak soon, and expects the stock will respond positively as that phase of the problem recedes. He also anticipates that margins at the company's giant defense business will rebound in the years to come as changing government needs lead to a better sales mix.
Is Wells Fargo right to call RTX a buy?
RTX does look like a good candidate to outperform in 2024 for the reasons Akers mentions. The Pratt & Whitney issue, though severe, has not gotten worse in the quarters since it was first disclosed, and appears to be contained. Checking all the engines in service that might have been impacted by material impurities is a time-consuming and expensive process that RTX expects to cost it upwards of $3 billion, but even with that added expense, the company is still holding firm to its plan to return upwards of $35 billion to shareholders through 2025.
Longer term, RTX still has issues to deal with. The company was one of the big losers in the Pentagon budget unveiled this week in terms of year-over-year procurement dollar figures. RTX has a portfolio of products that are in demand from military customers, but lacks some of the major platforms that tend to get constant funding through both high- and low-spending times.
RTX is set up well to be among the top performing aerospace stocks of 2024, but for those focused on the next five to 10 years, it would make more sense to consider some of its defense prime rivals.
