Weak Global Growth Will Weigh On United Technologies’ Earnings

by Trefis Team
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A weak global economy will weigh on fourth quarter earnings of United Technologies (NYSE:UTX). The diversified industrial company will announce earnings Wednesday, January 23. The company has forecast full year 2012 sales of $58 billion, marginally below 2011 sales of $58.2 billion, and earnings to lie in the range of $5.25 to $5.35 per share in 2012, down from $5.58 per share in 2011. [1]

In the nine months ended September 30, 2012, revenues were flat while net income was lower by 15% on a year-over-year basis. [2] Low growth in building markets, limited growth at Otis, Carrier, fire and security businesses of the company, and the slower than expected rate of growth in commercial aviation industry impacted Pratt & Whitney’s performance, Sikorsky and the aerospace component business. We anticipate these trends to continue to impact the company’s performance in the fourth quarter.

We currently have a stock price estimate of $86 for the company, in-line with its current market price.

See our complete analysis of UTC here

Strategic Portfolio Transformation And Slackened Growth In The Commercial Aviation Industry

UTC started transforming its portfolio in 2012 to have a greater stake in the global commercial aviation industry. The company undertook multiple acquisitions and divestitures for the same.

In June 2012, it acquired Rolls Royce’s interest in International Aero Engines (IAE), to strengthen its position in the aircraft engine market. In July 2012, it acquired Goodrich for $18.4 billion (including $1.9 billion of debt), to become a leading global supplier of aerospace parts like landing gears, aircraft nacelles, actuation and interior systems. UTC has also divested a number of non-core businesses, including the legacy Hamilton Sundstrand industrial business for $3.46 billion. [3]

As a result of these acquisitions and divestitures, the company increased its presence and stake in the global aviation industry. However, the slowdown in Europe reduced profitability of European airlines slackening growth in the global commercial aviation industry. This impacted demand for aerospace components and engines manufactured by UTC. Thus, in the fourth quarter and in the near term, we anticipate growth in aerospace businesses of UTC to remain moderate.

According to our estimates, these businesses (Pratt & Whitney, UTC Aerospace Systems and Sikorsky) constitute around 52% of the total company value. However, over the long-term replacement demand from Europe and North America and additional capacity demand from Asia-Pacific, sales and earnings at these businesses will likely see strong growth.

Additionally, acquisitions, particularly of Goodrich, increased the company’s debt levels. At the end of the third quarter of 2012, UTC’s total debt increased nearly 180% y-o-y to $28.7 billion and its debt to total capitalization ratio increased from 31% to 52% over the same period. [2]

Monetary Easing In China Will Promote Growth In Building Related Businesses Of UTC

On the bright side, monetary easing in China will promote sales in building related businesses of UTC. China reduced its key interest rates around mid-2012 as its inflation came well below the Chinese government mandated 4%. This worked towards increasing construction spending in the country, promoting sales of elevators and escalators. Otis is a leading player in the Chinese elevator market and benefits from this. Additionally, China is the largest market for Otis thus improving sales in the country are having a significant impact on the overall performance of the division. According to our analysis, Otis constitutes approximately 25% of the total company value.

Along with rising construction spending in China, the recovering residential and commercial building industry in North America is also adding to growth at building related businesses (Otis, and building fire and security systems) of UTC.

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Notes:
  1. UTC Reports Third Quarter EPS From Continuing Operations of $1.37, October 23 2012, www.utc.com []
  2. UTC’s financial tables at the end of third quarter, October 23 2012, www.utc.com [] []
  3. United Technologies Completes Sale of Industrial Products Businesses to The Carlyle Group and BC Partners, December 13 2012, www.utc.com []
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