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Dow-30 Earnings: United Technologies - Third Quarter 2012
Industrial bellwether and Dow-30 component United Technologies (UTX – Free United Technologies Stock Report) has reported results for the September period that are best described as a mixed bag. Earnings outdistanced expectations, but the top line was shy of what both we and Wall Street were anticipating, largely the result of foreign currency effects. The investment community has apparently grown inured to this type of quarterly report after many of UTX's brethren and a number of Dow-30 members released similar results. That said, these shares were relatively flat following the announcement.
United Technologies' portfolio of operations was in a state of flux during the three-month period. Still, after sifting through a few nonrecurring and discontinued operations charges and benefits, share net came in at $1.37. This figure was $0.20 higher than our call, and normally might well spark a share rally. However, management has intimated that the majority of the outperformance stems from recently acquired aerospace equipment maker Goodrich, the integration of which has been less costly than anticipated. Switching over to revenues, the top line figure was reported at a hair over $15 billion. This tally was below our $15.6 billion target, but it still represented a 9% sequential increase. The downside to that is that much of this growth was generated via acquisitions, masking slower organic revenue gains and a strengthening U.S. dollar, which puts a dent in all overseas sales.
For the full year, we are tweaking our figures to get in line with the guidance provided by management. Our top-line estimate has been lowered by just over $500 million to an even $58 billion. Conversely, our bottom-line expectation has risen by a nickel, to $5.35 a share. It is worth noting that UTX management is known to err on the side of caution, a stance we agree with given the choppy economic waters. Regardless, this trait makes the company prone to large earnings outperformances and we are not ruling such an occurrence out for the December interim. Too, both of the aforementioned 2012 numbers are contractions from the figures put up in 2011, but investors need to realize that this is a transition year for United Technologies. We continue to think that the moves being made now will vastly enhance profitability out to the end of this decade and beyond.
In that vein, the company has brought on the high-profile Goodrich deal, and purchased Rolls-Royce's stake in IAE, a joint venture with MTU Aero Engines AG and Japanese Aero Engines. The prospects of the former under the UTX umbrella are very bright, and the latter is already contributing to the bottom line. With these additions, management decided to divest the units that make rocket engines, wind turbines, and industrial pumps. The refined portfolio should now have a leaner cost structure and is situated in industrial areas that have favorable growth characteristics for the coming years. The majority of the heavy lifting is now complete, and we envision a scenario where the company's earnings reports become much cleaner in the near future, as nonreccurrings dissipate.
Now that the transformation with regard to individual units is basically completed, it will be execution and integration that will be the focus. Of course, these two areas will need to be on point given the uncertain economic conditions around the globe. The commercial aerospace aftermarket is one arena that will need to be monitored. The lack of a sustained recovery here is troubling and is one of the primary reasons behind the previously mentioned revenue trimming for this year. Other areas have held their own through some headwinds. New equipment orders at the Otis unit, which manufactures elevators, were up 7% year over year, and that figure included 4 percentage points of unfavorable currency swings. Too, North American HVAC demand rose 3% against 2011's tally.
With an eye towards 2013, we think even with worldwide macroeconomic concerns that United Technologies may well have a banner year. The Goodrich deal is integrating faster and running at a less expensive rate that anyone expected. We now anticipate a $0.60 share-net contribution from this division, $0.10 higher than our initial call. Tacking that dime on to our bottom-line call for next year would result in a jump to $6.35 a share, or nearly a 20% annual advance. Too, cash flow generation should approach record levels. If so, share repurchases may return in 2013 to add further upside to earnings potential.
In sum, we think this blue chip stock is a safe and defensive play for all conservative portfolios. It boasts a Safety of 1 (Highest) and a Beta on par with the overall market. Add to that impeccable financials and a secure and growing dividend that continued to rise even through the most recent recession. Too, now that the changes in its business lines are completed, for the most part, the strength of its growth engine in the coming years will probably pique the interest of those with a more aggressive bent.
About The Company:United Technologies operates in six business segments (excluding recently acquired Goodrich). Pratt & Whitney (revenues of $13.4 billion in 2011) makes and services aircraft engines. Otis ($12.4 billion) manufactures and services elevators. Carrier ($12.0 billion) makes heating, ventilating, and air-conditioning equipment. Sikorsky ($7.4 billion) makes helicopters. UTC F&S ($6.9 billion) provides security and fire protection services. Hamilton Sundstrand ($6.2 billion) produces aerospace and industrial products. The company also has a power division dealing in fuel cells. International operations account for nearly half of revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.