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Investment Overview for United Technologies (NYSE:UTX)
- Pratt and Whitney EBITDA margins: UTC has been showing promise in this business segment by researching and developing new state of the art aviation engines. The company has a contract with the U.S. Air Force to develop the F135 engine for their F35 jets while also developing a liquid fuel J-2X engine to support NASA’s vision for space exploration. If it is able to meet these challenges, it will be able to command a premium for its products, leading to an increase in Pratt and Whitney EBITDA margins. Should this occur, and margins exceed 20.5% versus our forecast of around 17.7% by the end of the Trefis forecast period, there would be a potential upside of nearly 4% to the current price estimate.
Otis EBITDA margins: With local competitors in international markets trying to compete against Otis on the basis of price, Otis' profitability might take a dip if it is not able to lower its costs. If that happens, Otis' EBITDA margins could fall from approximately 24% to about 20% by the end of the forecast period, thus providing a downside of about 4% to the Trefis price estimate.
United Technologies (UTC) is a diversified industrial conglomerate. The company's brands and products include Carrier heating and air conditioning, Hamilton Sundstrand aerospace systems and industrial products, Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, UTC Fire & Security systems and UTC Power fuel cells. The company's brands are among the markets leaders in most of the segments in which it operates. The company's business is conducted through about 4000 locations in 71 countries. It derives over 60% of its total segment sales from outside the U.S., including U.S. exports.
United Technologies' products are sold to both retail and commercial customers. Among commercial customers, the U.S. Government is the largest, accounting for over 18% of the company's sales. Business customers combined account for nearly 60% of total sales.
UTC is a highly research-focused company, regularly spending upwards of $1.5 billion each year on R&D. The company also conducts customer-funded research of almost equal value.
We estimate that the Pratt and Whitney and Otis businesses constitute about half of United Technologies' value, for the following reasons:
New engines and improvement in existing engines drive continuous demand for Pratt and Whitney products
Constant innovation in the aircraft engine space, and demand for powerful, more efficient engines allows for consistently strong demand for the company's products without much cyclicality (despite the cyclical nature of the airline industry). This is because even when new aircraft manufacturing is in a down cycle, there is still demand for more advanced engines. Given Pratt & Whitney's market position and commitment to R&D, we expect the company to see strong revenue growth despite increasing competition.
Otis' clear market leadership position allows for premium pricing
Otis is the world's largest elevator and escalator manufacturer with a very strong brand. It is also the market leader in China, the world's fastest growing elevator market. However many local players have been entering the market trying to compete on the basis of price. However we expect that Otis' brand name and superior products will allow for continued premium pricing which will keep margins healthy.
Growth in emerging markets
Emerging economies such as India and China will drive significant growth in many of UTC's markets such as elevators, HVAC and other industrial products in the near-term. As the middle class grows in these countries and disposable income increases, there will be a substantial increase in not only consumer demand (for products like air conditioners) but also commercial demand for elevators, fire and security products and industrial goods. These regions are also expected to see a boom in air travel, which should drive demand for aircraft engines.
Rapid advances in technology
As technology life cycles are extremely short, the successful companies will be the ones which are able to constantly innovate. Given United Technologies' commitment to R&D, the company should be able to maintain a market leadership position.
Renewal of aircraft fleets
Many airlines are replacing their old fleets with ones that are equipped with more advanced technologies and more efficient engines. According to Boeing estimates, around 35,000 new commercial airplanes will be delivered to over the next twenty years. This provides a huge opportunity for aircraft product and engine manufacturers.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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