United Technologies, (UTX - Free United Technologies Stock Report) an industrial conglomerate that makes various items, such as escalators, jet engines, and commercial HVAC equipment, has reported second-quarter financials. Both revenues and earnings eclipsed both our and Wall Street's expectations, prompting management to increase the lower ends of its respective guidance ranges for the balance of the year. Still, the stock was down about 2% in recent trading, as investors mulled over narrowing margins in some areas and minor concerns with engine production levels.
Revenues for the three-month interim registered $15.28 billion, above our $15.21 billion call and last year's $14.87 billion tally. The Otis elevator branch reported a 1% gain in year-over-year sales, while the jet engine unit Pratt & Whitney displayed a top-line gain of 6.7% for that stretch. Conversely, the aerospace division's sales receipts were 2% lower than the second quarter of 2016. As has been the case of late, much of the headlines went to the heating, cooling and fire safety branch, which includes Carrier Corp. Here, sales rose a healthy 5.7%, but the focus remained on an employment deal made with the Trump Administration over an Indianapolis plant closure. Elsewhere, it looks like the supply chain problem with the geared turbofan engine has been remedied. This woe had been causing problems with Airbus deliveries and was an overhang for UTX stock. The aforementioned Pratt arm had to retest some engines in the period, but it still plans to deliver 350 to 400 this year. In sum, 145 engines were built in the first half, seven more than in the first six months of 2016. All told, production is expected to ramp up in the latter half of this year.
Share net adjusted for certain charges like restructurings came in at $1.85, handsomely ahead of our $1.77 target, and even further above Wall Street's reduced outlook. This amount is also up from the $1.82 posted in the second quarter of 2016. However, profit margins came down a bit in several regions, most notably China, which certainly contributed to the investor trepidation we have seen of late. Tougher economic conditions in that country are making it harder to sell elevators and other industrial goods, while the construction scene there needs to be monitored closely going forward. Too, engine makers typically lose money on the initial production of new types until costs can be reduced. UTX is dealing with those types of issues from a profitability standpoint, as well. CEO Gregory Hayes stated that engine losses will likely peak next year. Efforts to reduce factory space and flatten the organizational structure are underway to counterbalance these losses.
Looking ahead, leadership tightened the full-year outlooks on both the top and bottom lines by boosting the lower tier of previously provided brackets. Now, revenue is tapped to be in a range of $58.5 billion to $59.5 billion, which would roughly translate to share earnings in a spread of $6.45 to $6.60. Our bottom-line target was already at $6.60 and it will stay put, but we do feel the need to shine a light on management's penchant to set the bar low and then hurdle it. Full-year revenue expectations, on the other hand, are being lifted by $450 million, to $59.5 billion.
At this point, we believe investors would be best-suited looking elsewhere. Even with the recent dip in price, these shares remain close to historical highs, at a time when the operating backdrop is far from ideal. We like the above average dividend yield and top notch Safety ranking (1: Highest), but the income component is not lofty enough to make up for what we foresee in the year ahead: turbulence. We would advise a strategy of buying on any sizable pullbacks from this point forward, for those that are eager to start building a position here.
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 ($16.9 billion) makes heating, ventilating, and air-conditioning equipment; and UTC Aerospace ($14.5 billion) produces aerospace and industrial products.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
