RTX's (RTX -0.29%) stock is down more than 5% over the last year amid operational difficulties in its commercial aerospace and defense businesses. That said, a Wells Fargo analyst recently upgraded RTX (formerly Raytheon Technologies) from "overweight" to "equal weight" and set a $120 price target on the stock. That suggests the stock price could jump 30% over the next 12 months or so.
RTX's two challenges in 2023
First, RTX's Pratt & Whitney business discovered a potential contamination in the powder coating used to make engine turbine discs, causing a multi-billion-dollar hit to earnings and cash flow. Engines will need to be removed and inspected over a few years.
Second, in common with other leading defense businesses, RTX suffers margin pressure from soaring raw material prices and supply chain challenges.
The Wells Fargo analyst believes there's upside potential to the stock price as RTX's defense business margins recover and Pratt & Whitney works through the engine inspections. After all, the supply chain challenges won't last forever. According to RTX management, the "majority of the incremental engine removals required by the fleet management plan will occur in 2023 and early 2024." Investors can expect an update on the latter in due course.
Is RTX stock a buy?
The analyst's argument for buying is strong. However, it makes sense to be a little cautious on the matter, given the guidance RTX management offered in January on its earnings call. Back then, management told investors it had baked in "$1 billion net of tax lower operating profit" into its 2025 guidance and would only meet its target of $7.5 billion in free cash flow in 2025 due to "$700 million of improvement in taxes" and a couple of hundred million dollars in better assumptions on pension outlays and working capital requirements.
As such, investors might want to wait to hear about improving earnings and ongoing cash flow before buying in.
