Engine Defect Update Key For RTX Earnings

RTX stock spiked Tuesday after the leading defense contractor reported Q3 earnings. General Dynamics (GD) reports on Wednesday followed by Northrop Grumman (NOC) on Thursday.

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The backdrop of a developing war between Israel and Hamas sparked greater interest in defense companies ahead of the earnings season. RTX stock is up 5.5% since Hamas’ Oct. 7 attack on Israeli civilians. General Dynamics shares jumped 6.6% since the outbreak of the conflict while NOC stock rallied 14.3%. Lockheed Martin (LMT) beat forecasts for its Q3 results last Tuesday and LMT stock is up 11.9% since Oct. 7.

Earnings Report Boosts RTX Stock

RTX (RTX) reported 3.3% adjusted earnings growth to $1.25 per share on 12% adjusted sales growth to $19 billion. GAAP earnings were a loss of 68 cents per share. That included the impact of the Pratt powder metal defect and accounting adjustments. Including the engine defect, sales fell 21% to $13.5 billion.

FactSet analysts expected the missile and fighter jet components supplier to report a slight uptick in adjusted earnings to $1.22 per share on 9.7% sales growth, to $18.59 billion. Wall Street forecasts had GAAP earnings down nearly 82% to 17 cents per share.

RTX’s backlog totaled $190 billion for the quarter, including $115 billion of commercial orders and $75 billion of defense orders.

The company also announced plans to sell its cybersecurity, intelligence and services business within its Raytheon segment for $1.3 billion.

For the year, RTX sees adjusted sales of $74 billion, the top end of its previous forecast. The defense contractor narrowed its adjusted earnings outlook to range between $4.98 to $5.02 per share, compared to the prior range of $4.95 to $5.05 per share. RTX expects free cash flow to improve to $4.8 billion from $4.3 billion.

In addition, the company plans to repurchase $12.8 billion of RTX stock, compared to $3 billion in 2022.

Engine Defect Slows RTX Stock

RTX stock dove in late July after its Q2 earnings beat revealed a manufacturing defect in the powdered metal used for engine parts in its Pratt & Whitney unit.

RTX CEO Greg Hays noted on Tuesday the company made “significant progress” on its assessment of the Pratt & Whitney engine defect and expects the financial impact to be in-line with the previously disclosed charge. Now, RTX is focused on its fleet management plan to mitigate the impact on customers.

Information released in September showed the issue affected hundreds of engines powering A32neo commercial planes made by Airbus. At that time, RTX said an average 350 planes could be grounded per year through 2026. As many as 650 jets could be out of commission in the first half of 2024. RTX expects the recall to cost up to $7 billion, with up to a $3.5 billion hit to pretax earnings over the next several years, including up to a $3 billion impact on pretax results for Q3.

UBS downgraded RTX stock to neutral from buy on Oct. 10 and lowered its price target to $80 from $110. The market looks like it expects $5.5 billion in free cash flow for 2025, compared to company estimates of $7.5 billion, UBS wrote in a research note. RTX has “strong” end markets, but it’s difficult to say if the metals issue will be the last to weigh on the 2025 guidance. UBS forecasts free cash flow growing at a 26% compound annual growth rate through 2027.

RTX stock spiked 7.2% Tuesday, jumping to retake its 50-day moving average. Shares over the past two weeks traded at their lowest level since February 2021.

RTX stock is down 22.3% in 2023 through Tuesday’s close.

General Dynamics

General Dynamics collaborates with Lockheed Martin to manufacture F-16 fighter jets. The company also produces wheeled combat vehicles, command and control systems, submarines and business jets.

FactSet analysts expect earnings declines accelerate for the second quarter in a row, falling 10.4% to $2.92 per share. Wall Street sees 0.8% revenue growth to $10.05 billion.

General Dynamics reached a tentative deal with striking United Auto Workers members in Michigan, Pennsylvania and Ohio late Sunday, ending weeks of negotiations. The four-year deal covers 1,100 workers and includes a 14% wage increase and protections against inflation, reduces time to reach top pay and “beats back the company’s proposed health care concessions,” according to the UAW. The agreement still has to be ratified by workers.

GD stock ticked slightly lower Tuesday after RTX earnings. Shares are trading in a saucer-with-handle base with a 245.06 buy point, MarketSmith data shows.

GD stock is down roughly 6.2% year-to-date.

Northrop Grumman

Northrop Grumman specializes in advanced missiles, missile components, defense systems and sensor technology. The company’s various manned aircraft include the A-10 Thunderbolt, B-2 Stealth Bomber, B-21 Raider, F-35 and the F/A-18 Super Hornet.

Analysts expect Northrop earnings fall for the first time in three quarters, sliding 1.4% to $5.81 per share. Revenue is guided increasing 6.8% to $9.58 billion.

RBC Capital lifted its price target on NOC stock to $515 from 500 on Oct. 16, expecting a favorable reporting season for defense stocks. RBC forecasts low-to-mid single digit sales growth and stronger backlogs, though comparable revenue in the second half of the year may be more challenging. Improvement on defense margins may be muted, but elevated global tensions should amplify positive results and limit downside risk, the firm wrote.

Northrop is well positioned thanks to its “high priority” long-term growth programs including the B-21 and Sentential Ground Based Strategic Deterrent (GBSD), an intercontinental ballistic missile system, UBS wrote in an Oct. 10 research note. The programs provide greater visibility and should drive overperformance. UBS initiated coverage of NOC stock with a buy rating and $555 price target.

NOC stock eased Tuesday morning after dipping below its 10-day moving average Monday. Shares are trading around mid-January levels and down 12.3% this year.

You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison

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