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Dow-30 Earnings: United Technologies - First Quarter 2013
Diversified manufacturer and Dow-30 constituent United Technologies (UTX – Free United Technologies Stock Report) has announced March-quarter results. Share net came in at $1.39, handsomely ahead of both our and the average Wall Street call. But revenues were $14.39 billion, which fell short of expectations, which averaged around $15 billion. Early on there was minimal investment reaction to the news, as this type of showing was largely to be expected with the ongoing sizable integration of both Goodrich and International Aero Engines (IAE), two entities that have given the company's portfolio a much heavier aerospace bent. At this point in mid-morning trading, however, the issue is down slightly.
Sales for the term were up 16% versus the like 2012 figure. This rise was driven by the benefit of net acquisitions, as organic revenues decreased 2% from the year-earlier quarter, reflecting ongoing weakness in Europe and a lull in the commercial aerospace aftermarket. Still, pockets of strength were evident. New equipment orders at Otis, the company's elevator and escalator arm, rose 24% year over year. China carried the growth torch for this segment with a 29% spike in that country alone. Also, equipment orders at UTC Climate, Controls & Security were up 5% internally. Large commercial engine spares orders jumped 14% at the Pratt & Whitney division, which makes and services engines for both commercial and military applications. However, overall commercial spares orders fell 28% here. This figure may be an aberration due to integration timing. On a pro-forma basis, adjusted to include Goodrich for 2012 and 2013, spares orders increased 2% at UTC Aerospace Systems.
All told, we are trimming our full-year 2013 top-line call by a hair, to an even $65 billion. That number is at the top of management's provided guidance range of $64 billion-$65 billion. We assume a gradual resumption of growth from continuing operations as 2013 progresses.
Returning to earnings, the $1.39 figure represents a 6% annual climb, an impressive feat given the flux of the portfolio. Recall that a number of noncore assets were divested after the aforementioned purchases were made. On the heels of the strong March-interim bottom line, we are boosting our 2013 call by a nickel, to $6.15 a share. This, too, is at the top of the in-house view, which ranges from $5.85 to $6.15. Earnings Predictability for UTX is high (95 out of 100), but we caution that this year is slightly more difficult to forecast due to the changes made to the company's holdings and the uncertainty surrounding the spares recovery and military spending. We anticipate this situation will cement itself over the next few months and visibility will improve considerably.
One item that could alleviate a number of problems is the hefty amount of cash flow that UTX generates. Cash flow from operations during this three-month span was $1.4 billion, with capital expenditures of $295 million. Share repurchases totaled $335 million in the first quarter, which puts the goal of $1 billion in buybacks for the year well within reach. Another $1 billion has been earmarked for acquisitions. That amount and recent comments from management lead us to believe that anything acquired this year will be of the strategic/bolt-on variety. Moreover, the strong cash position should allow United Technologies to pay down $2 billion in debt this year, double what was originally expected to be eliminated.
From an investment perspective, we like these shares for a number of reasons. The dividend payout is well-covered and rising steadily. Indeed, the yield already exceeds the Value Line median and we expect payments to grow steadily out to 2016-2018. UTX is one of the few high-profile companies that was able to maintain its dividend even during the height of the most recent recession. This yield, coupled with worthwhile appreciation potential three to five years hence, also makes this high-quality equity a smart play for long-term total return, in our view.
About The Company:United Technologies operates in five business segments: Pratt & Whitney (revenues of $14.0 billion in 2012) makes and services aircraft engines; Otis ($12.1 billion) manufactures and services elevators; UTC Climate ($17.1 billion) makes heating, ventilating, and air-conditioning equipment; Sikorsky ($6.9 billion) makes helicopters; UTC Aerospace ($8.3 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.