Analysts at the Bank of America (BoA) have lowered their rating and price target for RTX, formerly known as Raytheon Technologies Corp (NYSE:RTX), on the significant near-term risks posed to the company’s valuation by its subsidiary Pratt & Whitney’s PW1100 geared turbofan (GTF) engine issues.
RTX on Monday updated investors on the issues surrounding the engine, supplied by Pratt & Whitney to Airbub for the A320 aircraft, noting the issue would result in a $3 billion charge on its third quarter financials.
RTX still expects that a total of about 1,200 engines will need to be removed and inspected but the cost and timing impact was above prior projections, the BoA analysts noted.
They downgraded RTX stock from ‘Neutral’ to ‘Underperform’ and reduced their price target from US$95 to US$75.
RTX shares traded at $74.56 on Thursday afternoon. It is down about 11% week-over-week.
“While some may think RTX is now a ‘value’ investment, we advise caution as we see significant near-term risks,” the analysts wrote in a note to clients.
“We think RTX will underperform our coverage universe until there is a clearer understanding of the necessary fixes, customer concessions and even organizational changes in the wake of this egregious manufacturing oversight.”
The analysts wrote that they were concerned about the non-linearity of the impact of the GTF engine issues.
“At peak levels, almost half of the GTF will be grounded, causing significant disruptions to operators worldwide,” they wrote.
“Additionally, we are concerned that the published number is lower than ultimately expected as they could be used as a starting point in the ongoing negotiation, like a self-fulfilling prophecy.”
They cited several near-term risks to RTX, including higher than expected customer concessions, currently estimated at $4.8 to $5.6 billion by RTX; increased scope of engine types impacted, which may also extend to military engines impacting the company’s position on future defence programs; and increased scope of subcomponents impacted, like the Compressor disk which was recently announced to be problematic.
They also pointed to incremental reputational damage to RTX’s management team and brand and restructuring risk at RTX’s legacy defence business.
“Strength at Collins Aerospace, in our view, will not be enough to balance the risks stemming from Pratt & Whitney and ongoing restructuring,” they wrote.
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