United Technologies’ Growth From Changed Business Mix Key To Earnings

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    Quick Take 

  • After the many changes in United Technologies’ (UTC) product portfolio in 2012, its business is now more closely linked to the global aerospace industry and the building markets worldwide.
  • In the first quarter, UTC will likely post growth in its revenues and profits due to a growing commercial aviation industry and the rising construction spending in the emerging countries and the U.S.
  • This growth will likely be partially offset by a decline in construction spending in Europe and the cuts in military aviation budgets of the U.S. government.
  • Also, three major divestitures in the first quarter will generate additional cash which will help UTC to pay down its debt.

In 2012, United Technologies (NYSE:UTX) undertook multiple acquisitions, including the $18.3 billion acquisition of Goodrich, and divested many non-core businesses to better align its interests with the global aerospace industry and the building markets worldwide. As a result of this product portfolio transformation, the company grew the share of its sales from commercial and military aerospace businesses to slightly above 50%, with the remaining coming from its infrastructure businesses. [1]

In the first quarter, we anticipate United Technologies (UTC) to post growth in its sales and profits due to the global commercial aviation demand as well as the construction spending growth in emerging countries and the U.S. This will be partially offset by a decline in the military aviation budgets of the U.S. government.

For full year 2013, UTC anticipates its revenues to grow by 11%-13% annually, to $64-$65 billion, and its earnings to grow to $5.85-$6.15 per share, from $5.35 per share in 2012. [2]

We currently have a stock price estimate of $102 for UTC, approximately 10% above its current market price.

See our complete analysis of UTC here

Rising Demand For Air Travel Is Driving Growth At Pratt & Whitney And UTC Aerospace Systems

Over the last few years, the global commercial aviation industry has grown steadily, driven by an increasing demand for air travel and air cargo transport. Air passenger traffic has increased year-over-year since 2009, which has allowed airlines to book profits after many years of losses. An improved financial health coupled with a rising demand for air travel has allowed airlines to expand/update their fleets through orders for new airplanes.

In 2013, we anticipate the global commercial aviation industry to continue to grow with aircraft manufacturers like Boeing (NYSE:BA), Airbus, Embraer and Bombardier delivering over 1,400 airplanes to airlines, up from around 1,350 in 2012, according to our estimates. This will increase the market for UTC’s Pratt & Whitney aircraft engines and its aerospace component business which was acquired from Goodrich. This growth in the market size is expected to translate in to growth in UTC’s results, as the company is well positioned with an advanced product portfolio and existing supply contracts with major aircraft manufacturers.

Increasing Urban Population Is Driving Demand For Otis Elevators & Carrier Air-Conditioners

In addition, a growing urban population in the emerging countries driven by migration of people from rural areas to cities is increasing demand for residential and commercial spaces. As a result, construction spending in these countries is continuing to rise. This is driving growth in demand for UTC’s building market products – Otis elevators and escalators, Carrier heating, ventilation and air-conditioning systems, and other building fire-safety and security systems.

Outside of the emerging countries, growth in the number of housing starts in the U.S. is also expected to grow sales of UTC’s building market products. In 2013, US housing starts are expected to grow significantly compared to 2012, according to Global Insight data cited by UTC. [1]

Euro Crisis And The U.S. Defense Spending Cuts Will Weigh On Growth

However, the growth from commercial aviation and the building markets of the emerging countries and the U.S. will likely be partially offset by a decline in construction spending in Europe, which is reeling under the sovereign debt crisis. In 2013, construction spending in Europe is expected to decline in low single-digit percentage range compared to 2012, according to Euroconstruct data cited by UTC. [1] This will impact sales of building market products of UTC.

Additionally, the decline in U.S. defense spending due to across-the-board cuts called sequestration, will impact sales of UTC’s military aviation products, which includes offerings from Pratt & Whitney and Sikorsky. In 2012, the U.S. government constituted roughly $11 billion of the $57.7 billion revenues of UTC. [3] Currently, the extent of the impact from government austerity is unclear, but if sequestrations persist then results in the military aviation business of UTC will face severe headwinds.

Cash From Divestitures Will Help Pay Down Debt

Apart from these major trends in the first quarter, UTC completed divestitures of three units – UTC Power Unit, Pump & Engine Control Systems Unit and Electric Power Systems Unit. The divestiture of UTC Power Unit was part of the strategy to increase focus on aerospace and building markets while the divestiture of the other two units was required by the regulatory clearance, which was granted for the Goodrich acquisition.

Cash from these divestitures will be used by UTC to pay off its debt, which was assumed to finance the many acquisitions of 2012, especially the Goodrich acquisition. At the end of 2012, UTC’s debt to total capitalization ratio was 46%, up from around 31% at the beginning of 2012. [4]

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Notes:
  1. UTC Overview presentation – investor and analyst meeting, March 14 2013, www.utc.com [] [] []
  2. UTC reaffirms 2013 outlook, January 8 2013, www.utc.com []
  3. UTC Overview presentation – investor and analyst meeting, March 14 2013, www.utc.com []
  4. Earning Results of Q4 – Form 8-K, January 23 2013, www.utc.com []
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