Why Pratt & Whitney's GTF Engine Issues Could Impact RTX Cash Flow Through 2025? Analyst Downgrades Stock

RBC Capital Markets analyst Ken Herbert downgraded RTX Corporation RTX to Sector Perform, lowering the price target to $82 from $105.

Following the company's update on the impact to the Pratt & Whitney Geared Turbo Fan (GTF) engine fleet arising from the previously disclosed rare condition in powder metal used to manufacture certain engine parts, RTX now anticipates a ~$3 billion FCF impact from 2023 through 2025, with ~80% of this going toward customer concessions. 

Herbert cautions of continued risks to the FCF outlook from the execution of the engine repairs and the customer concessions. 

Given the already constrained supply chain, the analyst thinks the GTF shop visits could drag on longer than expected. 

Although the company has a good handle on the totality of the maintenance and inspection costs, Herbert believes there is a risk of further delays in the timing of aircraft on the ground.

The analyst flagged an algorithm that implies ~$14k per aircraft per day hit, which may be a focus of negotiations. 

RTX indicated that the expected 2025 FCF impact is $1.5 billion, and it is now guiding to a 2025 FCF of $7.5 billion.

Herbert anticipates these negotiations to be a headline risk as airlines are vocal about the impact on their capacity.

The company has indicated a gross impact of ~$5.2 billion for customer concessions (~80% of the $6.5 billion gross impact). 

Herbert anticipates the disruptions from an average daily number of 350 aircraft AOG also to be a significant headline risk.

For FY24, the analyst lowered adjusted EPS estimates from $5.65 to $5.61. 

RTX is still trading above its historical average on an FCF basis, and Herbert believes it will be a substantial period before investors are confident in the P&W outlook.

Price Action: RTX shares are trading lower by 2.28% to $75.15 on the last check Tuesday.