Recovering Organic Sales Driven By Acquisitions Will Boost United Technologies’ Earnings

by Trefis Team
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    Quick Take 

  • In the third quarter, we expect United Technologies (UTC) to post strong year-over-year growth in sales and profits, driven by the acquisitions of Goodrich and International Aero Engines (IAE) last year.
  • Excluding these acquisitions, the company’s organic sales are expected to post moderate growth driven by the surge in orders in recent months.
  • Growth in organic sales will be constrained by a mixed macro environment especially due to the economic slowdown in Europe and weak defense spending in the U.S.

United Technologies (NYSE:UTX) will announce its third quarter earnings Tuesday, October 22. The industrial conglomerate will likely post strong growth in sales and profits driven by the Goodrich and IAE acquisitions last year. Excluding these acquisitions, UTC’s organic sales, led by the surge in orders seen in the previous quarter, will also likely grow in the third quarter compared to the flat growth seen last quarter. We expect the recovery in UTC’s organic sales to be moderate as it continues to face a mixed macro environment across businesses.

For full year 2013, UTC anticipates revenues to climb 11% annually to around $64 billion, and its earnings to rise 12%-15% annually to $6-$6.15 per share. [1] In the first half, the company’s revenues and earnings were up 16% and 5%, respectively. [2] Separately, the decline in UTC’s debt which increased substantially last year following the $18.3 billion acquisition of Goodrich will be in focus in the third quarter earnings.

We currently have a stock price estimate of $116 for UTC, around 10% ahead of its current market price.

See our complete analysis of UTC here

Strong Order Inflows To Drive Recovery In UTC’s Organic Sales

UTC’s organic sales were flat on a year-over-year basis in the second quarter, up from a 2% year-over-year decline in the first quarter. [2] [3] We anticipate this growth momentum in organic sales to continue in the third quarter based on the positive order trends seen in recent months. Last quarter, new equipment orders at Otis grew 23% annually, equipment orders at Climate, Controls and Security (CCS) rose 6% annually, large commercial engine spare orders at Pratt & Whitney grew 65% annually driven by the incremental IAE share, and commercial spare orders at UTC Aerospace Systems grew 4% annually. [2] This surge in order inflows will likely allow UTC to raise its deliveries in the third quarter to boost organic sales.

At the same time, despite this surge in orders, we expect the recovery in UTC’s organic sales to be moderate as it faces an uneven macro environment.

Mixed Building Markets – China Up, Europe Down

In the building markets business that determines the performance at Otis and CCS, UTC is seeing stable construction spending from China but a sustained weakness in spending from Europe. In the first two quarters of this year, the slowdown in Europe impacted sales at both Otis and CCS, which provides Carrier heating, ventilation and air-conditioning (HVAC) systems, fire prevention systems and building security solutions. We anticipate the weakness from Europe to continue to impact UTC’s results in the third quarter, while stable construction spending from China, reflected through a 35% annual rise in new equipment installation orders at Otis from the country in the last quarter, will boost UTC’s results in the current quarter. [1]

Mixed Aerospace Markets – Commercial Up, Military Down

Similarly, in the aerospace markets, which determines performance in the Pratt & Whitney, UTC Aerospace Systems and Sikorsky segments, UTC is seeing a mixed demand environment with higher demand from commercial aviation that is being offset by weak demand from military aviation.

In the military space, Pratt & Whitney’s military engine shipments are facing pressure from defense budget cuts in the U.S. In the first half of this year, the segment’s military engine shipments declined to 53, from 78 in the prior year period due to reduced U.S. defense spending. [1] Sales of UTC Aerospace Systems, which manufactures aviation components, and Sikorsky from the military aftermarket also faced headwinds due to government austerity. These trends are expected to continue to weigh on the company’s results in the third quarter. Additionally, UTC depends on the U.S. government for a significant portion of its revenues. Last year, the government constituted $11 billion of the company’s $57.7 billion revenues with a large portion of this coming from the sale of defense equipment that included military engines from Pratt & Whitney, aviation components from UTC Aerospace Systems and military helicopters from Sikorsky. [4]

On the bright side, sales of Pratt & Whitney, UTC Aerospace Systems and Sikorsky from commercial aviation are rising, driven by higher demand from aircraft manufacturers such as Boeing (NYSE:BA), Airbus, Bombardier and Embraer. These original equipment manufacturers are hiking their production rates in order to make timely deliveries against their growing order books, which are being driven by replacement (of older aircraft) demand from developed markets and fresh capacity demand from developing markets.

In all, as a result of these mixed trends, growth in UTC’s third quarter organic sales will likely be moderate.

Decline In Debt In Focus

Also in focus in the third quarter earnings will be the progress that UTC has made in lowering its debt load. The company’s debt to total capitalization rose from 31% at the beginning of 2012 to 53% at the end of the third quarter of 2012, driven by the Goodrich acquisition which was closed during the quarter. [5] [6] Even though the company steadily paid down its debt since, its debt to total capitalization ratio at the end of the previous quarter stood at 43% – much higher than the levels seen prior to the Goodrich acquisition last year. [2] We figure UTC needs to continue to pay down its debt to reduce the risk to its business, and it will be important to note the progress the company posts on this front in its third quarter earnings.

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Notes:
  1. UTC’s Q2 2013 earnings presentation, July 23 2013, www.utc.com [] [] []
  2. UTC’s Q2 2013 earnings form 8-K, July 23 2013, www.utc.com [] [] [] []
  3. UTC’s Form 8-K filing for 2013 first quarter earnings, April 23 2013, www.utc.com []
  4. UTC Overview presentation – investor and analyst meeting, March 14 2013, www.utc.com []
  5. Earning Results of Q4 – Form 8-K, January 23 2013, www.utc.com []
  6. UTC’s financial tables at the end of third quarter 2012, October 23 2012, www.utc.com []
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  • commented 10 months ago
  • tags: UTX CAT
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