RTX stock has 30% upside, according to one Wall Street analyst.

RTX‘S (RTX 0.62%) The stock is down more than 5% over the past year due to operating difficulties in its commercial aerospace and defense businesses. in other words, wells fargo The analyst recently upgraded RTX (formerly Raytheon Technologies) from “overweight” to “equal weight” and set a $120 price target for the stock. This suggests the stock could rise 30% over the next 12 months.

Two challenges for RTX in 2023

First, RTX’s Pratt & Whitney division discovered that potential contamination in powder coatings used to make engine turbine disks could result in a multibillion-dollar hit to its profits and cash flow. Over the years the engine will need to be removed and inspected.

Second, like other major defense companies, RTX is experiencing margin pressure due to surging raw material prices and supply chain issues.

Wells Fargo analysts believe the stock has upside potential as margins in RTX’s defense business recover and Pratt & Whitney moves forward with engine inspections. After all, supply chain problems won’t last forever. According to RTX executives, “the majority of the incremental engine removals required by the fleet management plan will occur in 2023 and early 2024.” Investors can expect an update on the latter in due course.

Is RTX stock a buy?

The analyst buy case is strong. However, given the guidance RTX management gave on its earnings call last January, it makes sense to be a little cautious on this matter. At the time, management told investors that its 2025 guidance included “$1 billion in tax-reduced operating profits” and that it would only meet its 2025 free cash flow target of $7.5 billion due to “$700 million in tax improvements.” Better assumptions about pension expenditures and working capital requirements have freed up hundreds of millions of dollars.

So investors may want to hear about earnings improvement and consistent cash flow before they buy.