RTX (formerly Raytheon Technologies) has recently announced a significant problem with its geared turbofan (GTF) aircraft engine, resulting in charges of approximately $3 billion. This issue, which was previously mentioned by the company in July, has caused the stock to decline by almost 8% on Monday.
Unfortunately, the scope of the problem has expanded. Initially, RTX estimated that around 1,200 engines would require additional inspection. However, the current number has grown to nearly 3,000 engines. As a result, investors have become increasingly uneasy, leading to a total decline of approximately 21% since the initial disclosure. This unease has also resonated with Wall Street, prompting several downgrades of RTX shares following the company's recent update.
One such analyst, Robert Spingarn from Melius, observed that there is now "too much risk in the story." Consequently, he downgraded his rating on RTX from Buy to Hold and revised his target price from $98 per share to $92.
Spingarn further highlighted the severity of the situation by comparing GTF engines to their counterpart, the LEAP engine built by General Electric (GE) and Safran (SAF.France). He noted that while 10% of aircraft equipped with GTF engines were out of service due to durability issues during RTX's presentation at the Paris Air Show in June, that number has since risen to 18%. In contrast, the competing LEAP engine has only experienced a 5% rate of aircraft being out of active service.
These developments bring added concerns for RTX and its investors. The company will need to address these issues promptly and effectively in order to regain market confidence and stabilize its value.
Company Faces Challenges in Achieving Profitability Goals
The company, RTX, is facing challenges in achieving its profitability goals due to a significant deficit. As a result, the company now anticipates generating approximately $7.5 billion in free cash flow by 2025, compared to the previous expectation of $9 billion. This $1.5 billion reduction has led to RBC analyst Ken Herbert downgrading the stock from Buy to Hold.
Analysts Adjust Price Targets
Ken Herbert, in a Monday report, highlighted the increased risk associated with the revised free cash flow guide. Consequently, he lowered his price target for RTX shares to $82 from $105. Similarly, Barclays analyst David Strauss downgraded shares to Hold and adjusted his price target to $75 from $100.
Analysts' Opinions on RTX Shares
Currently, approximately 54% of analysts covering the company rate RTX shares as Buy, which is slightly below the average Buy-rating ratio for stocks in the S&P 500, which sits at about 55%. It is worth noting that before the engine issue was known, around 68% of analysts rated the shares as Buy at the end of June.
Decline in Stock Performance
Over the past 12 months, RTX stock has experienced a decline of about 12%. During premarket trading, shares have further decreased by 1%. In comparison, both S&P 500 and Dow Jones Industrial Average futures are down by approximately 0.2%.