Shares of industrial conglomerate United Technologies (UTX – Free United Tech. Stock Report) were little changed after the company announced first-quarter results that beat expectations in terms of both revenues and earnings. The Dow-30 member also raised its full-year outlook for both the top and bottom lines.
Revenues for the three-month period clocked in at $15.242 billion, up from $13.815 billion in the same period last year and ahead of our $14.630 billion estimate. The 10% year-over-year incline was constructed of 6% organic growth and a 3% contribution from foreign currency gains. The remaining percentage point is classified as “other” in UTX's presentation. The majority of these organic gains were generated in the Americas and on the aerospace front. The climate and controls arm posted handsome results on both the North American residential side of the coin and from a global commercial perspective. Pratt & Whitney sales were also a bright spot: sales jumped 15%, with strength in both military and commercial aftermarket receipts. Similar positives were displayed at UTC Aerospace, which has been beefed up over the years with sizable acquisitions.
Share net for the March quarter came in at $1.77 on an adjusted basis. The year-ago figure was $1.48 and the consensus expectation for this quarter was hovering around the $1.50 mark. Otis showed some concerns on the profit front, mostly stemming from pricing pressure in China. Service investments also took a toll on that unit. Elsewhere, the other divisions more than picked up the slack. Restructuring and productivity gains helped the climate and control segment post increased profit metrics. The remaining two aerospace entities (P&W and UTC Aero) saw profitability rise by a double-digit percentage. Pratt's aftermarket strength was the driving force behind the improvement, while a slimmed down cost structure fueled UTC.
With the March-quarter numbers now in the books, management has upped both of its full-year 2018 guidance brackets. First, the revenue outlook now stands in a range of $63.0 billion to $64.5 billion. It had previously been $62.5 billion to $64.0 billion. Next, the EPS target was increased from a spread of $6.85 to $7.10 a share to between $6.95 and $7.15. In response we are boosting our 2018 estimates to the apex of each of these ranges, or $64.5 billion and $7.15 a share, respectively. Leadership has historically set the bar low and hurdled it more often than not. Based on its upgrades, we believe that cost-reduction efforts are running ahead of schedule. Too, the favorable global macroeconomic environment creates a nice tailwind.
Leadership did not provide any more color on the possibility of a breakup of the company as we awaited the conference call. CEO Gregory Hayes had been against such moves as recently as six months ago, but lately it appears that stance has softened. The Rockwell Collins purchase and changes to the tax code are two matters that likely prompted the re-thinking. We continue to believe that splits are a wise move when there is a neglected area, which is not the care here. Yes, the aerospace arm is going to be sizable with Rockwell on board (that pact should close in June or July). However, we would like to see how the overall portfolio does post-Rockwell before further contemplating spinoffs and the like. The strong March-period showing has us more inclined to forget a breakup altogether.
At the recent stock price, we do not see much investment appeal here. The dividend yield is a few ticks above the Value Line median, so income investors have a case, albeit not an overwhelmingly strong one. Strong financials are another plus for this high-quality selection (Safety: 1). Still, near-term prospects are not ideal, and the capital-appreciation potential three to five years hence is subpar. We would advise looking for better value elsewhere among the blue-chip industrials, for now, until a better entry point presents itself with regard to UTX stock.
About The Company:United Technologies operates in four business segments: Pratt & Whitney makes and services aircraft engines; Otis manufactures and services elevators; UTC Climate, Controls & Security makes heating, ventilating, and air-conditioning equipment; and UTC Aerospace Systems produces aerospace and industrial products.
— Erik M. Manning
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
