United Technologies, (UTX – Free United Technologies Stock Report) an industrial conglomerate with a sizable aerospace component, has reported third-quarter results. The company beat both our and Wall Street's expectations in terms of revenue and earnings. Further, management raised its full-year 2017 guidance brackets for the top and bottom lines. The shares were up more than 1% in early trading today, but have since pulled back, as much of the spotlight was taken by other Dow-30 components that put up eye-catching numbers this morning.
The top line for the three month interim clocked in at $15.06 billion, up handsomely from the $14.35 billion posted in the same period last year, and above our call of $14.96 billion. The showing at UTC Aerospace Systems was flat versus the year-earlier comparison, but other areas of the portfolio put up solid net sales growth metrics (Otis was 5% higher; UTC Climate, Controls & Security rose 6%; and Pratt & Whitney advanced 11%). New equipment orders also came in at adequate levels, led by the aerospace side of the coin, consisting of Pratt & Whitney and UTC Aerospace Systems. Here, commercial aftermarket sales were up 11% for each of those entities. The lone ordering rough patch was at Otis, where orders were down 4% on a constant-currency basis year to year.
On the bottom line, adjusted EPS, which excludes restructuring and nonrecurring costs, tallied $1.73, down 2% when placed up against last year's figure, but four cents ahead of the consensus expectation. Too, the costs associated with the Rockwell Collins acquisition (discussed below) began to appear on UTX's books in the third quarter. A $27 million charge related to this work was registered during the term. Related figures should be on the rise in that regard over the next year or so.
The Rockwell Collins pact should get most of the headlines in the coming months. The proposed $23 billion (closer to $30 billion with the assumption of debt) deal would be the largest in aerospace history, and would boost United's exposure on the aerospace front significantly. More specifically, it could increase the company's presence as a major supplier to both Boeing and Airbus. CEO Gregory Hayes referred to the marriage as ``transformational'', but stopped short of providing an update on how the regulatory approval process was going. This may lead to a touch of investor trepidation; however, we feel the deal will get done, as UTX and Rockwell make different parts of the airplane. Still, the agreement needs to get over a number of regulatory hurdles around the globe, with the strongest headwinds likely to develop in Europe. Separately, securing Rockwell within the portfolio may well prompt management to shop another one of its platforms. Any reports out there at this time are pure speculation. This situation will need to be monitored closely as completion of the acquisition nears a landing. Early indications suggest that approvals should be secured by the third quarter of next year.
Looking out to the balance of the year, adjusted EPS guidance for full-year 2017 was raised to a range of $6.58 to $6.63, up from the previous expectation of $6.45 to $6.60. Also, the sales bracket was set at $59.0 billion to $59.5 billion, versus $58.5 billion to $59.5 billion previously. Our expectations will remain static, as they were already within these parameters on the high ends. As such, we continue to look for revenues of $59.5 billion, translating to share net of $6.60. Additionally, no further significant share repurchases or acquisitions are in the works.
From an investment perspective, we think United Technologies' high-quality stock (Safety: 1) is fairly valued in the current market. Appreciation potential for the stretch to 2020-2022 is only about average with the quotation up around the $120-a-share mark. With that, the income component is the primary draw of this blue chip. The yield is comfortably ahead of the Value Line median of 2.0% and the quarterly payout was just recently upped to $0.70 a share. Financials are rock solid and should remain that way even after the lofty price tag of the Rockwell Collins purchase is digested.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
