Shares of industrial conglomerate and Dow-30 component United Technologies (UTX – Free United Technologies Stock Report) were up slightly in value following the release of the company's third-quarter financials, which showed higher revenues and earnings than what both we and Wall Street were looking for. Another positive in the report, management raised its full-year bottom-line outlook.
Revenues for the September quarter clocked in at $19.5 billion, up from $16.51 billion in the year-earlier period, and ahead of our $19.33 billion estimate. Much of the year-over-year increase was the result of the sizable Rockwell Collins acquisition, which has brought UTX's aerospace platform to the next level. This entity came on board at a time when the aerospace market in general was performing admirably and allowed the company to further capitalize on the situation. This strength was much needed at this time, as Carrier operations have not been great. Weak order figures for refrigeration and HVAC products on the global stage have continued, and Otis has been struggling with new equipment orders in Europe and North America. Too, in China, some market share was lost so leadership got more aggressive on pricing to drive sales growth. We like this move because the elevator aftermarket service aspect is very appealing from a margin standpoint.
For the three-month window, share net registered $2.21 after adjusting for nonrecurrings tied to the pending spinoffs of Otis and Carrier. This amount was comfortably ahead of our $2.04 call and Wall Street's consensus, which was a penny lower. Higher revenues and a lower tax rate were primary contributors to the earnings growth.
Subscribers will recall there are a lot of moving parts here at this time. As stated, UTX will be breaking into three pieces in the early stages of 2020. The Otis elevator arm will be one, the Carrier HVAC operations two, and then the remaining aerospace parts will be the third. Shortly thereafter, the aerospace branch will then merge with Raytheon to form Raytheon Technologies. Initial reaction to the aerospace marriage was somewhat cold, but most parties are coming around on the deal, and shareholder approval on both sides of the coin was granted earlier this month. Still, this is a complex situation, and a portion of the investment community is likely waiting on the sidelines for now, especially given the stock's sharp rise in valuation thus far in 2019.
These maneuvers are next year though. For the balance of 2019, management has boosted its earnings outlook and tweaked its revenue range to factor in the aforementioned concerns outside of the aerospace arena. Share net is now likely to come in a spread of $8.05 to $8.15, versus the previously provided range of $7.95 to $8.05. Separately, the top line is now pegged to end up between $76.0 billion and $76.5 billion. This tightened a wider net that had been cast earlier this year ($75.5 billion to $77.0 billion). In turn, we are moving our figures to the apex of these guidance ranges; revenues of $76.5 billion and earnings of $8.15 a share.
So are UTX shares a buy at current price points? We would have to say no at this juncture. Capital appreciation potential from recent quotation is subpar, and the yield is only in line with the Value Line average. Better options exist among industrials, and mostly all of those are not dealing with the layer of M&A risk that UTX is currently carrying. Post spinoffs and mergers our view may brighten, but we will cross that bridge when we get to it.
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
