United Technologies (UTX – Free UnitedTech Stock Report), an industrial conglomerate and Dow-30 member, has released second-quarter results that beat consensus expectations on both the top and bottom lines. Management also noted that spinoff plans and a deal to merge with aerospace/defense company Raytheon (RTN) remained on schedule for 2020. Moreover, it upped its earnings guidance bracket for full-year 2019. On the heels of this strong report, UTX stock was up modestly.
In terms of revenue, the company posted a year-over-year top-line gain of 18%. That resulted in revenue of $19.63 billion, which was ahead of our $19.54 billion call. Digging deeper, the 18% gain was made up of a 13% contribution from the Rockwell Collins acquisition, and six points of growth was organic. These figures were offset by a 1% negative effect of foreign exchange headwinds. Commercial aftermarket sales at Collins Aerospace jumped 75% on a post-merger basis, and the Pratt & Whitney jet engine segment saw its revenue increase by roughly 9% year over year.
The aerospace-related operations also propelled profitability. The Collins Aerospace arm's profit margin rose to 17.8% versus a 14.4% reading in the second quarter of 2018. Also, Pratt & Whitney's operating profit was 6.8% better than a year earlier, resulting in a profit margin of 8.2% for that division. All told, adjusted diluted share net clocked in at $2.20, handsomely above the $2.05 we were looking for and the Wall Street consensus expectation, which was a penny below our mark.
Leadership also updated its full-year earnings outlook in a positive manner. Previously, the 2019 earnings bracket had been set at $7.80 to $8.00 a share, now that spread has been lifted to $7.90 to $8.05. United's management is well-known for setting the bar low and then hurdling it, so we will be pushing our new earnings estimate right to the apex of this range, or $8.05 a share. Separately, the annual revenue expectation was maintained in a block from $75.5 billion to $77.0 billion. Our figure is also at the top rung of these amounts. Elsewhere, organic revenue gains are now expected to equate to between 4% and 5%, one point higher on both ends, and free cash flow generation should come in between $4.5 billion and $5 billion, this amount includes a one-time cash payment of $1.5 billion related to planned spinoffs of the Otis and Carrier units.
Speaking of the coming separation, management intimated that thus far everything remains on schedule and the plan continues to be the same as was laid out in its last update. The conglomerate is set to spin off both its Otis elevator arm and Carrier HVAC business by the middle of 2020. At that time, standing alone will be the Collins Aerospace and Pratt & Whitney aerospace divisions as the new UTX. Then, once the spinoffs are completed, UTX would merge with Raytheon to form a leading aerospace and defense systems company. While the merger makes sense on numerous fronts, activist investors are not pleased. Many activist investors clamored for a breakup to unlock value in these shares and once they got their wish, management rushed right into a merger, thus convoluting an already complex situation.
Still, shares of UTX are up considerably in value (roughly 25%) thus far in 2019, and are approaching all-time highs just north of the $144 mark. For this reason, we no longer like this selection as a three- to five-year play. However, we do still think the stock has room to run in the near term, as the spinout approaches and operations remain healthy. Too, income investors should like what they see here. The yield is on par with the Value Line median.
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
