Raytheon Technologies Corp. RTX recently announced that its business unit, Pratt & Whitney, is on schedule to complete preliminary design review (PDR) for the F135 Engine Core Upgrade (ECU) and move into the detailed design phase in early 2024. Once accomplished, this upgraded F135 will be installed in the Block 4 upgrade of the F-35 fighter jets.
This upgrade has been funded through a $115 million contract awarded to Raytheon in December 2022 and an additional funding provided in the fiscal 2023 Defense Appropriations bill.
Benefits of the Upgrade
This upgrade will give the F135 engine the capabilities it needs to meet and exceed the F-35 jet’s growing requirements for power and thermal management while improving durability and restoring life to the engine.
Notably, the F135 ECU is the fastest, most cost-efficient and lowest-risk path to support Block 4 upgrade for all global F-35 operators. It is projected to yield $40 billion in lifecycle cost savings by avoiding disruptive and costly air vehicle changes and leveraging the current global sustainment infrastructure.
To this end, it is imperative to mention that Lockheed Martin’s LMT F-35 jets already enjoy a steady flow of orders from the U.S. Army, seven international partner countries and eight foreign military sales customers. Notably, Lockheed has delivered 899 F-35 airplanes since the program's inception, with 340 jets in the backlog as of Mar 26, 2023.
This reflects the solid demand that F-35 jets enjoy in the combat aircraft market, which in turn also boosts the demand for F135 engine. The latest upgrade, once completed in 2024, should further bolster F135’s demand, thereby supporting Raytheon’s future revenue growth.
Future Prospects
In March 2023, the Department of Defense chose to upgrade the F135 instead of replacing it with an entirely new engine. With the U.S. government's current inventory target being 2,456 F-35 aircraft for the U.S. Air Force, Marine Corps and Navy, we may expect more production contract for F135 engines, especially for the upgraded ones. This, in turn, is expected to boost RTX’s earnings in the days to come.
Such a solid inventory target will also benefit other defense majors like Northrop Grumman NOC and BAE Systems Plc BAESY that are involved in the production of F35 jets.
Northrop Grumman: The company renders its expertise in carrier aircraft and low-observable stealth technology for the F-35 program. A pioneer in the development of manned combat aircraft, NOC has a tradition of providing technological leadership in all aspects of military aviation and aircraft.
Northrop Grumman has a long-term earnings growth rate of 3.8%. The Zacks Consensus Estimate for NOC’s 2023 sales indicates a year-over-year improvement of 4.7%.
BAE Systems: This defense major’s short takeoff and vertical landing experience, along with air systems sustainment, supports F-35’s combat capabilities. The company provides an electronic warfare suite for F-35, which includes fully integrated radar warning (targeting support and self-protection) to detect and defeat surface and airborne threats.
BAE Systems boasts a long-term earnings growth rate of 13.7%. The Zacks Consensus Estimate for BAESY’s 2023 sales indicates an increase of 24.8% from the previous year’s reported figure.
Price Movement
In the past year, shares of Raytheon have risen 9.9% compared with the industry’s growth of 13.4%.
Image Source: Zacks Investment Research
Zacks Rank
Raytheon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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