TD Cowen believes aftermarket demand will drive gains at Raytheon

© Reuters.

By Michael Elkins

TD Cowen reiterated an Outperform rating and $120.00 price target on Raytheon Technologies (NYSE:RTX) as analysts believe that aftermarket demand is strong enough to drive solid 2023-24 gains.

They wrote in a note, “Robust air traffic recovery & heavy use of older aircraft due to delivery slips are driving healthy aftermarket demand with strong pricing and growing backlogs. Moreover, accelerating ASMs, a stabilizing supply chain, and snapback from pre-buy restrained Q4 suggest RTX's 2023 aftermarket sales gains could top its 16-20% guide. We also see healthy A/M lift in 2024 as air traffic should top 2019's baseline since real GDP is forecasted 11% above 2019."

The DoD’s 2024 budget decision to have Pratt update the F-35, and keep it sole sourced, effectively removes the risk of a competition with GE for a new engine plant that could have moved into production in 2029. In addition, RMD will benefit from missile replenishment from the Ukraine war as well as U.S. weapons restocking to meet a potential Chinese threat and foreign sales to allies to meet both potential Russian threat in Europe and Chinese aggression in the Asia Pacific.

The analysts expect updated 2025 targets at the company’s investor day on June 19. The targets should remain intact ex the $1 billion Section 174 hit to RTX's $10B cash flow bogey. RTX will review revenue synergies of the sector reorganization with retroactive restatement of prior year results; and its commercial aero story should be upbeat with aftermarket now in a profit sweet spot.

TD Cowen estimates a 1Q EPS of $1.19 for RTX (compared to the Street's $1.12 estimate), which assumes a 22% commercial aftermarket sales uptick.

Shares of RTX are up 0.86% in afternoon trading on Tuesday.