RTX Corp shares target lifted, market perform rating on spare engine impact

On Friday, Bernstein raised the price target for RTX Corp. (NYSE:RTX) shares to $134 from $124, while maintaining a Market Perform rating on the stock. The adjustment reflects a new understanding that the financial impact of lower-priced spare engine deliveries in airline contracts is less severe than previously thought.

The analyst from Bernstein noted that although spare engine trends are still considered a headwind for RTX Corp., the scale of the impact is more modest. Spare engines are critical to the financial performance of engine manufacturers like Pratt & Whitney, a division of RTX, as well as competitors GE and Safran (EPA:SAF), because they typically offset losses from on-wing engine sales.

For Pratt & Whitney in particular, the analyst estimates around 200 spare engine deliveries in 2024. Given Pratt's 51% stake in the PW1100 engine, the expected contribution to segment earnings is approximately $640 million for 2024. This figure is significantly lower than previous estimates due to the new finding that roughly two-thirds of spare engines are being sold directly to airlines at prices well below market rates.

Despite this, Pratt is anticipated to build a pool of spares in the market, which will eventually need to be reduced, affecting earnings. Nonetheless, Pratt's margins are expected to grow modestly to 9.5%, supported by higher lifecycle engine (LCE) aftermarket sales, Pratt Canada, and the defense sector.

In addition to the revised price target, Bernstein has increased their earnings per share (EPS) forecasts for RTX Corp. for 2024 and 2025 to $5.59 (up from $5.57) and $5.92 (up from $5.89), respectively. This is based on slightly higher revenue projections for Pratt & Whitney.

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