United Technologies (NYSE:UTX) posted strong growth in its revenues and earnings in the first three quarters of this year driven by acquisitions and cost cutbacks. At a recent investor meet, the industrial conglomerate guided its full year 2013 revenues to be around $63 billion, up from $58 billion last year, and its 2013 earnings to be around $6.15 per share, up 15% from $5.35 per share last year.  This strong growth in United Technologies’s (UTC) 2013 results is largely the result of the incorporation of full year sales from Goodrich, which it acquired in July 2012. At the same time, organic growth and order inflows which were a concern for UTC at the start of 2013 improved steadily through the year. Currently, the company continues to witness strong order inflows and anticipates its macro environment to improve in 2014, from 2013, driven by recovering building markets of Europe and the U.S..
In our opinion, in 2014, UTC due to its portfolio’s focus on global building and aerospace markets will benefit from the recovery in European building markets and the rising demand from the commercial aerospace sector. The company’s 2014 profits will also benefit from its ongoing cost reduction activities. Accordingly, UTC forecasts its 2014 earnings to rise by 7-11% annually to $6.55-6.85 per share on organic sales growth of 3-4% annually. However, the company anticipates its 2014 revenues to rise at a more moderate annual growth rate of 2% to $64 billion, due to divestitures offsetting organic growth. 
We currently have a stock price estimate of $119 for UTC, around 5% below its current market price.
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Focused Portfolio Will Tap Growing Building & Commercial Aerospace Markets
Over the last couple of years, UTC through multiple acquisitions and divestitures aligned its product portfolio with global building and aerospace markets. Any of the company’s units that did not fit in with this strategic alignment were sold off including a wind turbine business (Clipper Windpower) and rocket engine business (Rocketdyne). In the coming year, this portfolio alignment will enable UTC to benefit from the slightly higher commercial construction spending expected from Europe. According to figures cited by the auto battery and auto seat maker Johnson Controls (NYSE:JCI), commercial construction spending from Europe will grow by 2% annually in 2014 after declining steadily for the last few years.  Recovering housing and commercial construction markets in the U.S. will also help grow in 2014 sales of UTC’s building market products which include Otis elevators and escalators, Carrier heating, ventilation and air-conditioning (HVAC) systems and building fire and security solutions from brands that include Kidde and Chubb.
Additionally, in 2014, UTC will merge all its building market related businesses in to a single unit, called Building & Industrial systems. We figure that this reorganization will enable the company to realize inherent synergies of these businesses that essentially sell to and service the same set of customers – new constructions and existing buildings. This reorganization will allow the company to pitch integrated solutions involving elevators, air-conditioners, ventilation systems, fire prevention systems and security solutions to customers. Such an offering will provide UTC with a competitive advantage that very few companies can match globally at present. In particular, this reorganization will enable the company to tap the growing global demand and preference for integrated building solutions from large residential and commercial constructions. Overall, these synergies will help grow results at UTC’s building market related businesses in 2014.
The remaining units of UTC which manufacture aircraft engines (from Pratt & Whitney) and aerospace parts like landing gear and aircraft nacelle will benefit from the growing demand from the global commercial aviation sector. Major aircraft manufacturers including Boeing (NYSE:BA) and Airbus are hiking their production rates driven by their large order backlogs. We currently estimate global commercial airplane deliveries to rise from 1,480 in 2013 to 1,550 in 2014 driving growth in global aircraft engines and parts market.
This in turn will increase shipment volumes of aircraft engines and parts manufactured by UTC.
Apart from growth led by improvement in UTC’s external environment, its 2014 profits will also benefit from its ongoing cost cutting initiatives. In the first three quarters of this year, the company’s segment operating margin improved to nearly 16%, from 14% in the same period last year, due to cost cuts.  Looking ahead, the company plans to undertake these activities through 2014 which will likely continue to expand its margins.
U.S. Budget Cuts Will Weigh On UTC’s Growth In 2014
On the flip side, budget cuts in the U.S. particularly in the military space will impact UTC”s growth in 2014. The company generates around 10% of its sales from the U.S. government mainly at its aerospace businesses. In 2014, due to budget cuts UTC anticipates its sales from the U.S. government to fall by 3-5% annually. Notes:
- UTC Chairman & CEO Expects 2013 Earnings Per Share of Approximately $6.15; Expects 2014 EPS of $6.55 to $6.85 on Organic Sales Growth of 3 to 4 Percent, December 12 2013, www.utc.com [↩] [↩]
- Johnson Controls strategic review and 2014 outlook, December 18 2013, www.johnsoncontrols.com [↩]
- UTC’s 2013 Q3 earnings form 8-K, October 22 2013, www.utc.com [↩]
- UTC’s investor and analyst meet, December 12 2013, www.utc.com [↩]