Commercial Aerospace Will Likely Lift UTC’s Net Amid Slower Organic Sales Growth

United Technologies (NYSE:UTX) will announce its third quarter earnings Tuesday, October 21. The industrial conglomerate is coming off a good second quarter in which its revenue and profit rose driven by higher demand from the global commercial aerospace sector, partially offset by weak U.S. military spending and lower demand from Europe. The company’s order inflows also remained strong during the second quarter, but its organic sales growth slowed to 3% year-over-year, after steadily rising since mid-2013 through the first quarter of 2014. ^[1]

In the third quarter results Tuesday, we will be closely watching how United Technologies’ (UTC) organic sales growth trends. This would provide an indication of the overall demand environment which UTC’s various businesses are facing. In addition, we expect UTC to post moderate growth in its earnings driven by the commercial aerospace sector and gains from past restructurings. For full year 2014, UTC anticipates its earnings to lie between $6.75 per share and $6.85 per share, compared with $6.21 per share in 2013. ^[1]

We currently have a stock price estimate of $119 for UTC, around 20% ahead of its current market price.

See our complete analysis of UTC here

Mixed Aerospace Markets – Commercial Up, Military Down

UTC generates roughly a third of its revenue from the global commercial aerospace sector. ^[2] The company’s Pratt & Whitney segment is a leading manufacturer of airplane engines, and its Aerospace Systems segment is one of the largest global suppliers of airplane components such as landing gears and brakes. So, UTC is a well established player in the global commercial aviation supply chain. With airplane makers including Boeing (NYSE:BA) and Airbus hiking their production rates, shipments of engines and airplane components from UTC have steadily increased, growing the company’s results. In the third quarter, we anticipate this trend to continue, driving growth in UTC’s profit.

However, demand from the U.S. military, which constitutes the bulk of UTC’s military aerospace business, will likely remain weak. Last quarter, UTC’s sales from the military aerospace sector fell by about 4% annually due to weak U.S. military spending. ^[3] The good thing for UTC however is that it is not highly dependent on military spending from the U.S. government. Military aerospace constitutes only about 20% of the company’s revenue. ^[2] So, the negative impact from lower U.S. military spending will likely be more than offset by growth from the commercial aerospace sector in UTC’s third quarter results.

Mixed Building & Industrial Markets – Asia & North America Up, Europe Down

Separately, results at UTC’s building and industrial segments, which include Otis elevators, Carrier air conditioners and Kidde/Chubb fire and security systems, will likely show flat-to-moderate growth in the third quarter. These businesses constitute the remaining portion – about 45% – of UTC’s revenue. Like UTC’s aerospace businesses, these building and industrial businesses are also facing a mixed demand environment with growth from Asia and North America and softer demand from Europe. In the previous quarter, UTC’s building and industrial sales rose by 5% from Asia and by 3% from the Americas, but they fell by 1% from Europe, the Middle-East and Africa (EMEA). ^[3] With no major signs of economic recovery in Europe, we figure UTC’s building and industrial sales from this region will likely remain depressed in the third quarter. So, Europe will likely continue to temper growth from Asia and North America in UTC’s building and industrial businesses in the third quarter.

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1. UTC’s 2014 Q2 earnings form 8-K, July 22 2014, www.utc.com [↩] [↩]
2. UTC’s investor and analyst meet presentation, March 13 2014, www.utc.com [↩] [↩]
3. UTC’s 2014 Q2 earnings presentation, July 22 2014, www.utc.com [↩] [↩]