A Wells Fargo analyst recently added RTX (NYSE: RTX) to a list of “tactical ideas” for the second quarter. The analyst maintained the company’s price target of $120 and an overweight rating on the stock. That would imply a 22% upside on the stock over the next 12 months or so.
The renewed enthusiasm for the stock is related to RTX’s ongoing problem with its Pratt & Whitney geared turbofan (GTF) engines. As a reminder, Pratt & Whitney found a potential contamination issue in the powder coating used on turbine discs in GTF engines.
In September, RTX management told investors that the “majority of incremental engine removals will occur in 2023 and early 2024.” As such, it seems likely that management will be able to give an even more solid estimate of the final cost of the inspections during the subsequent quarterly earnings.
As such, the issue may be fully priced in, and removing uncertainty could lead to some upside potential for the stock. This will help, but there’s no guarantee that management’s update will be positive.
The analyst’s suggestion that defense margins will increase in the future is also open to debate. Margin pressure has affected other major defense contractors like Boeing and Lockheed Martin. It’s unclear whether this is a temporary issue that will improve as raw materials become more available and supply chain issues are resolved.
Alternatively, it could be a structural problem arising from, in the words of Lockheed Martin CEO Jim Taiclet, governments “taking advantage of that monopsony power, if you will, over the industry” or even rising geopolitical tensions making it harder to procure defense materials from certain parts of the world.
Whatever it is, until defense contractors can start demonstrating margin expansion, the questions will remain.
Image source: Getty Images.
RTX is an attractive stock, but investors who value certainty will probably want to see what management says about the GTF inspections issue and some evidence of margin expansion among defense contractors before initiating a long-term position in RTX.
Should you invest $1,000 in RTX right now?
Before you buy stock in RTX, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and RTX wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 1, 2024
Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
—
Blog powered by G6
Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.
For any inquiries, please contact [email protected]
