United Technologies (UTX – Free United Tech. Stock Report), a company that makes everything from jet engines to escalators, has released its operating figures for the three-month period ended December. Revenues and earnings beat consensus expectations, and the shares were up less than 1% once again approaching all-time highs.
Fourth-quarter revenues tallied $15.7 billion, 7% higher year over year, and well ahead of the consensus call of $14.6 billion. It also beat our higher expectation of $15.5 billion. The showing was powered by a lift in commercial sales at its Pratt & Whitney engine unit and some strengthening pockets of its sizable Aerospace arm. Elsewhere, new equipment orders at the climate, controls, and security branch were 9% greater than at this time last year. One notable area that was not strong was the Otis elevator division. This platform continues to hold its own on the domestic front, as well as in Europe, but results coming out of China have not been great. Intense competition in that country erased much of the good news elsewhere, and the year-over-year orders gain clocked in at just 1%.
Excluding items deemed one-time in nature, earnings per share summed to $1.60, comfortably ahead of the $1.51 consensus and our $1.54 expectation. A nonrecurring charge was recorded in the period of $0.90 a share stemming from the new U.S. tax law, and management disclosed that it expects to make a cumulative net cash payment of $1.5 billion through 2026 relating to the new tax structure. Also, given the new tax law, management plans to quickly repatriate $2 billion in overseas cash. It will use these funds to reduce the amount it is borrowing for acquisitions and to pay down debt at a more rapid rate.
Looking ahead to full-year 2018, leadership guided adjusted earnings per share to a range of $6.85 to $7.10, fueled by organic sales growth of 4%-6%. In line with Value Line convention, these metrics exclude the impact of the company's proposed acquisition of Rockwell Collins (COL). Using history as a guide, management at UTX likes to set the earnings bar low. Therefore, we are adding a quarter to our 2018 EPS estimate, which brings it to the top rung of the provided bracket, or $7.10. A good bit of this increase should be powered by a lesser tax burden. Still, 2018 does not come without concerns. Followers of the UTX story will recall that the company is banking heavily on its fuel-saving geared turbofan to drive future results. Production issues on this platform arose last year, but have been smoothing out over time. Regardless, further speeding up production is vital to meet what it hopes is swelling demand. Therefore, it is expected that $1.1 billion worth of engine margin losses will be on the books this year. How this situation plays out will go a long way in where exactly the earnings needle lands.
We think UTX stock is priced fairly in the current market. Trading north of the $135-a-share level there is only average appreciation potential here out to 2020-2022. Too, the dividend yield is on par with the average of all the stocks under our coverage, so there is little to get excited about at recent price points. Buying on the dips is an option, but we think more enticing plays are available in terms of investing in industrial conglomerates at this juncture.
About The Company:United Technologies operates in four business segments: Pratt & Whitney (revenues of $14.9 billion in 2016) makes and services aircraft engines; Otis ($11.9 billion) manufactures and services elevators; UTC Climate, Controls & Security ($16.9 billion) makes heating, ventilating, and air-conditioning equipment; and UTC Aerospace Systems ($14.5 billion) 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.
