United Technologies (UTX – Free United Tech. Stock Report), an industrial conglomerate that makes everything from engines to elevators, has reported financials for the third quarter of 2018. Revenues and earnings beat both our and Wall Street's expectations, and the company upped its full-year outlook. However, the stock was unable to generate any significant positive momentum on a morning where the Dow fell sharply at the opening bell.
Revenues for the three-month period came in at $16.51 billion, which compared favorably to the year-earlier figure of $15.06 billion (up 10% year over year), and our estimate of $16.16 billion. Quarterly sales rose in all four of the company's operating segments. Revenues grew 8% organically, on the strength of gains made in areas where innovation investments are now starting to bear fruit. More specifically, the Otis elevator arm saw growth north of 2%; the UTC Climate, Controls & Security branch doubled that figure at just over 4%; the Pratt & Whitney engine unit saw its top line jump by nearly 24% year on year, due to the continuing strength of some engine programs; and the UTC Aerospace Systems segment posted a gain of roughly 9%.
Adjusted share net for the third quarter clocked in at $1.93 versus $1.73 in the like period of 2017. We were looking for EPS of about a dime lower than that. Excluded from the adjusted figure's calculation is $0.39 in restructuring and other significant charges for the interim. That said, it was not an ideal period on the cost side of the ledger. The cost of products and services sold rose nearly 13% year over year and SG&A expenses flared up by more than 6%. All told, the reported adjusted operating margin fell 90 basis points, to 14.1%, versus the same quarter last year.
The company also updated its guidance for full-year 2018 in a positive manner. Fresh ranges were provided for both the top and bottom lines. The new sales bracket stretches from $64.0 billion to $64.5 billion. The previous spread was $63.5 billion to $64.5 billion. For the bottom line, management is now looking for adjusted EPS of between $7.20 and $7.30, compared to the previous call of $7.10 to $7.25. This marks the second time in a row that leadership has boosted its outlook alongside an earnings announcement. Our figures were already a hair above the previously provided brackets, and we will now be doing the same with the spreads announced today. Historically, UTX executives have set the bar low and then hurdled it. We look for more of the same as 2018 draws to a close. In that vein, our new estimates are for revenues to come in at an even $65 billion, which would then equate to share net of $7.35, or a dime higher than our call at the time of our early October review.
At least initially, no new news was given on the potential breakup of the company. For months, rumors have been swirling that UTX could split into several pieces. Management has not yet announced the results of a strategic review of operations, and we expect they are waiting for after the completion of the Rockwell Collins acquisition. At that time, the aerospace arm would be sizable, and could easily be spun out as its own entity. Speculation is that the Otis segment and Climate & Controls would be the other parts. The costs associated with these types of maneuvers may ultimately be the key to whether or not leadership pulls the trigger. We are prone to believe they are leaning in the direction of a breakup at this time.
From an investment perspective, we think UTX stock has some appeal. The high-quality selection (Safety: 1) is a bit undervalued relative to some of its industrial peers, which has fueled the breakup talks. The dividend yield is worthwhile as a standalone metric, but when coupled with decent price appreciation potential out to 2021-2023, the total return picture comes into focus. Patient investors should be rewarded over that span and may well end up with pieces of several entities should a split of the conglomerate come into play.
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
