RTX Corporation’s RTX business segment, Pratt & Whitney, recently secured a contract worth up to $1.3 billion to continue working on the F135 Engine Core Upgrade (“ECU”), which will increase the engine's longevity. These upgraded F135 engines, once integrated into the F-35 jets, are expected to boost this fighter aircraft’s performance.
RTX’s F135 Engine Core Upgrade Benefits
The ECU is an upgrade developed by Pratt & Whitney for its F135 engines to provide an affordable, low-risk and agile pathway for enhancing propulsion capability for all three variants of F-35 jets. The ECU is the only engine that offers all global F-35 operators the additional power and thermal management capacity needed to enable next-generation weapons systems and sensors.
The ECU upgrade will meet the necessary requirements for the Block 4 upgrade of F-35 jets, which is aimed at enabling the F-35 aircraft to carry more weapons and improve its electronic warfare capabilities.
The fact that the F135 ECU is expected to generate tens of billions of lifecycle cost savings makes it the most cost-effective solution for the block 4 upgrade of F-35 jets. The recent contract win is a testament to that.
What’s Favoring RTX?
Amid the rising geopolitical unrest worldwide, countries are rapidly increasing their military spending to improve their capacity for battle. With aerial security being an important section of a nation’s defense map, there remains solid demand for combat-proven jets like the F-35.
Built by America's largest defense contractor, Lockheed Martin LMT, the F-35 enjoys a profitable position in the combat aircraft market, with this aircraft being the most lethal fighter jet worldwide. One of its most recent developments is the Czech Republic's intention to buy 24 F-35s, becoming the 18th nation to join the F-35 global team in the first quarter of 2024. This suggests that demand for Lockheed's F-35 fighter is skyrocketing.
The increased demand for the F-35 allows RTX, the manufacturer of the jet's engine, F135, to get a steady stream of orders from the Pentagon, U.S. allies and other international customers. Pratt & Whitney has delivered almost 1,200 F135 engines to date.
The production of LMT’s F-35 jets is expected to continue for several years, given the U.S. government's current inventory target of 2,456 aircraft for the Air Force, Marine Corps and Navy. This should boost the demand for F135 engines and can be expected to boost its order growth in the near future. Such order growth should boost the top line of RTX’s Pratt & Whitney unit, which registered 19% year-over-year sales growth in the second quarter of 2024.
Prospects for RTX’s Peers
The aforementioned F-35 inventory target should also benefit other defense majors like Northrop Grumman NOC and BAE Systems BAESY, which are involved in the production of this aircraft.
Northrop Grumman produces the F-35 aircraft's center fuselage, the AN/APG-81 Active Electronically Scanned Array radar and communications subsystems and provides sustainment support for the Electro-Optical Distributed Aperture System. Moreover, NOC’s Integrated Communications, Navigation, and Identification, incorporated in F-35 jets, is one of the most advanced integrated avionics systems ever engineered to enhance pilot effectiveness.
Northrop has a long-term (three to five years) earnings growth rate of 8.7%. The Zacks Consensus Estimate for NOC’s 2024 sales suggests growth of 5.4% from the prior-year reported figure.
BAE Systems is another key partner in the manufacturing of F-35 jets. The rear fuselage of every F-35 in the global fleet has been built by BAE Systems. It also manufactures vertical and horizontal tails for F-35 jets. The company provides an electronic warfare package for the F-35 that includes a fully integrated radar warning (targeting support and self-protection) to detect and eliminate surface and airborne threats.
BAE Systems boasts a long-term earnings growth rate of 12.4%. The Zacks Consensus Estimate for BAESY’s 2024 sales implies an improvement of 37.4% from the 2023 reported figure.
RTX Stock Price Movement
In the past six months, shares of RTX have risen 22.9% compared with the industry’s 6.7% growth.
Image Source: Zacks Investment Research
RTX’s Zacks Rank
RTX currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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