RTX Faces Growing Problem with Geared Turbofan Engine

RTX (formerly Raytheon Technologies) recently revealed a significant issue with its geared turbofan (GTF) aircraft engine, resulting in a $3 billion charge. This problem has led to a downgrade in the company's stock, causing it to decrease almost 8% on Monday.

Initially, RTX estimated that around 1,200 engines would require further inspections. However, this number has now increased to approximately 3,000 engines. The escalation of the issue has caused concern among investors, resulting in a 21% decline in shares since the initial disclosure. Wall Street has also taken notice, with multiple downgrades of RTX shares following the company's update.

According to Melius analyst Robert Spingarn, there is now too much risk associated with the RTX story. In his report, he downgraded the company's rating from Buy to Hold and lowered the target price from $98 to $92 per share.

Spingarn highlighted the durability issues faced by the GTF engines during RTX's presentation at the Paris Air Show in June. At that time, 10% of aircraft flying with GTF engines were out of service due to these concerns. However, the number has now risen to 18% of aircraft out of active service. In comparison, the competing LEAP engine developed by General Electric (GE) and Safran (SAF.France) has only seen about 5% of its engines out of operation.

The growing magnitude of the issue surrounding RTX's GTF engine is causing significant challenges and uncertainty for the company, leading many analysts and investors to revise their assessments of its value and prospects.

RTX's Profitability Goals in Jeopardy

The latest figures indicate that RTX, the renowned company, may face difficulties in achieving its profitability goals. Previously, it was expected to generate approximately $9 billion in free cash flow by the year 2025. However, the projected estimate has now been reduced to around $7.5 billion, signifying a significant $1.5 billion cut.

This revised projection has led RBC analyst Ken Herbert to downgrade RTX shares from Buy to Hold. In a recent report, he expressed concern over the potential risks associated with the revised free cash flow guide. Consequently, Herbert has adjusted his price target for the company's shares to $82, down from the previous target of $105.

Likewise, Barclays analyst David Strauss has downgraded RTX shares to Hold from Buy and has revised his price target to $75, down from $100. These analysts' actions reflect a cautious sentiment regarding the future prospects of RTX.

At present, approximately 54% of analysts who cover the company rate its shares as Buy. This falls just slightly below the average Buy-rating ratio for stocks listed in the S&P 500, which is around 55%. It is worth noting that before the full extent of the engine issue became known, around 68% of analysts rated RTX shares as Buy at the end of June.

The average target price set by analysts currently stands at about $95 per share, a decrease from the previous estimation of approximately $110 just a few months ago.

Over the past 12 months, RTX stock has experienced a decline of about 12%. In premarket trading, shares are currently down an additional 1%. Simultaneously, both S&P 500 and Dow Jones Industrial Average futures are facing a similar downward trend with a decrease of approximately 0.2%.