Industrial conglomerate and Dow-30 component United Technologies (UTX – Free United Technologies Stock Report) has announced its financials for the second quarter of 2018. The results topped expectations in terms of both earnings and revenues. Management also lifted its earnings-per-share guidance for the current year. On the heels of this strength, the stock was up more than 3% in early morning trading.
For the three-month period, revenues registered $16.71 billion, comfortably ahead of the consensus of $16.26 billion and up considerably from the year-earlier tally of $15.28 billion. The top line grew 6% on an organic basis year over year, but as has become the case with UTX, aerospace-related segments carried the growth torch. Notably, Pratt & Whitney's sales jumped 16.4% versus the same period in 2017, and UTC Aerospace Systems revenues rose 8.8%. Elevator maker Otis posted a 6.8% top-line advance, and the UTC Climate, Controls & Security branch put up a 6.9% gain. One other caveat, UTX has submitted a proposal to provide the engine for Boeing's (BA - Free Boeing Stock Report) new midmarket airplane, the 797. This would be a significant win on the aerospace front, but recent rumors are that Boeing is wavering on whether or not to go ahead with the new plane. Some color here may arise in Boeing'squarterly earnings release, which is due out tomorrow.
At the bottom line, quarterly adjusted earnings clocked in at $1.97 a share, a 6% year-over-year increase from the second quarter of 2017. We had been looking for $1.85 a share, which was in line with the Wall Street consensus. The GAAP figure for the quarter was $2.56 a share, but we are excluding restructuring and other one-time items that arose in the interim. Notably, a gain on the sale of Taylor Company is not included in our presentation, due to the fact that it is nonrecurring in nature. Digging deeper, the operating margin fell 80 basis points, to 14.2%. The dip was brought about by a sizable uptick in the cost of goods sold, as well as a rise in SG&A expenses. Significant relief on the tax line helped to alleviate some of these negatives, but the aforementioned profitability metric still contracted. However, overall operating profit was up handsomely year over year at Pratt & Whitney, and the climate arm's figure nearly doubled versus the like-2017 period.
Elsewhere, management boosted the guidance brackets for 2018 for both the top and bottom lines. Revenues are now expected to come in between $63.5 billion and $64.5 billion. Certainly, the Rockwell Collins acquisition is a contributor in this increase, but the company's recent performance gets a nod, as well. The forecast for earnings is now $7.10 to $7.25 per share, up from $6.95 to $7.15 previously. This figure excludes the effect of the Rockwell purchase, which is apt to dilute the bottom line in the range of $0.10 to $0.15 a share. Those that follow our commentary on this blue chip will know that leadership has historically set the bar low and then hurdled it. Therefore, we are increasing our sales and earnings calls to the apex of each provided range. Our full-year top-line estimate goes from $64.27 billion to $64.50 billion, and our EPS expectation is now a dime higher, or $7.25.
Nothing particularly enthralling arose on the breakup front. Subscribers will recall that whispers of a UTX separation have gained steam of late, as activist investors push for change. Management has been a bit keener on the notion in 2018, but remains focused on the integration of Rockwell. Our stance is that much of this directly stems from the troubles at General Electric and the subsequent dissection of the conglomerate's business model. That type of scrutiny is deserved in that situation, but United does not have a struggling appendage (or several) that are bringing down the overall portfolio. So why break it up at this juncture? Yes, unlocking value for shareholders is a plus, and some tax advantages are now present. Still, we see no reason to rush in at this point. In a year or so, our view may well change.
From an investment perspective, we are hard pressed to recommend this Dow component at such lofty price points. Trading north of $130 a share after today's incline, the selection is an average play using our primary investment criteria. Appreciation potential three to five years hence is below average, and the yield is only on par with the Value Line median. The underlying business is performing well, but much of these positives look to be already baked into the recent quotation. With that, we would suggest subscribers look elsewhere, for now, until a more appealing 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
