RTX stock witnessed a significant boost on Tuesday following the release of their Q3 earnings. The upcoming earnings reports of General Dynamics (GD) on Wednesday and Northrop Grumman (NOC) on Thursday have attracted increased attention from investors.
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The ongoing conflict between Israel and Hamas has sparked increased interest in defense companies leading up to the earnings season. RTX stock has increased by 5.5% since the Oct. 7 attack by Hamas on Israeli civilians. General Dynamics shares have risen by 6.6% since the outbreak of the conflict, while NOC stock has rallied by 14.3%. Lockheed Martin (LMT) surpassed expectations with its Q3 results last Tuesday, leading to an 11.9% increase in LMT stock since Oct. 7.
RTX Earnings
RTX reported a 3.3% growth in adjusted earnings to $1.25 per share, with a 12% sales growth to $19 billion. GAAP earnings showed a loss of 68 cents per share, which included the impact of the Pratt powder metal defect and accounting adjustments. Including the engine defect, sales fell by 21% to $13.5 billion.
FactSet analysts anticipated a slight increase in adjusted earnings to $1.22 per share, with a 9.7% sales growth to $18.59 billion. Wall Street forecasts predicted GAAP earnings to decline by nearly 82% to 17 cents per share.
RTX’s backlog for the quarter amounted to $190 billion, with $115 billion in commercial orders and $75 billion in defense orders.
The company also announced its plan to sell its cybersecurity, intelligence, and services business within the Raytheon segment for $1.3 billion.
For the year, RTX projects adjusted sales of $74 billion, which is at the top end of its previous forecast. The defense contractor has narrowed its adjusted earnings outlook to a range of $4.98 to $5.02 per share, compared to the prior range of $4.95 to $5.05 per share. RTX expects an improvement in free cash flow, rising to $4.8 billion from $4.3 billion.
Additionally, the company plans to repurchase $12.8 billion of RTX stock, compared to $3 billion in 2022.
Engine Defect
RTX stock experienced a decline in late July after its Q2 earnings revealed a manufacturing defect in the powdered metal used for engine parts in its Pratt & Whitney unit.
RTX CEO Greg Hays stated that the company has made “significant progress” in assessing the Pratt & Whitney engine defect and expects the financial impact to align with the previously disclosed charge. Currently, RTX is focused on implementing its fleet management plan to mitigate the impact on customers.
Information released in September indicated that the issue had affected hundreds of engines powering A32neo commercial planes made by Airbus. At that time, RTX estimated that an average of 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 a pretax earnings impact of up to $3.5 billion over the next several years, including up to $3 billion for Q3.
UBS downgraded RTX stock from buy to neutral on Oct. 10 and lowered its price target from $110 to $80. According to a research note from UBS, the market appears to anticipate $5.5 billion in free cash flow for 2025, compared to the company’s estimate of $7.5 billion. UBS believes that while RTX has “strong” end markets, it is uncertain if the metals issue will be the last factor to weigh on the 2025 guidance. UBS forecasts free cash flow to grow at a 26% compound annual growth rate through 2027.
RTX stock saw an 8.3% premarket spike on Tuesday, which implies a potential surge to retake its 50-day moving average if this upward movement continues. Over the past two weeks, shares have traded at their lowest level since February 2021.
RTX stock has declined by 27.5% in 2023 as of Monday’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.
According to FactSet analysts, General Dynamics is expected to experience an acceleration in earnings decline for the second consecutive quarter, dropping by 10.4% to $2.92 per share. Wall Street predicts a 0.8% increase in revenue to $10.05 billion.
General Dynamics reached a tentative agreement with striking United Auto Workers members in Michigan, Pennsylvania, and Ohio on Sunday, bringing an end to weeks of negotiations. The four-year deal covers 1,100 workers and includes a 14% wage increase, protection against inflation, reduced time to reach top pay, and the prevention of proposed health care concessions by the company, as stated by the UAW. The agreement is still awaiting ratification by workers.
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