UTC’s Results Rise On Higher Commercial Aerospace Demand; Organic Sales Growth Improves

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United Technologies

United Technologies (NYSE:UTX) reported solid growth in its revenue and profit in the third quarter as the company’s sales rose across all its segments. The industrial conglomerate’s organic sales growth also recovered to 5% (on a year-over-year basis) in the third quarter after falling marginally in the previous quarter. We figure this is a good trend which indicates that the overall demand environment across all businesses of United Technologies (UTC) is improving. The company’s third quarter revenue rose by 5% annually to $16.2 billion, and its earnings rose by 32% annually to $2.04 per share on additional gains from cost cutbacks. [1]

Based on this double-digit earnings growth and 5% revenue growth, the company expressed confidence that it would be able to achieve its 2014 earnings target of $6.75-6.85 per share. This compares to UTC’s earnings of $6.21 per share in 2013. We are in the process of incorporating UTC’s third quarter earnings and shall update our analysis shortly.

See our complete analysis of UTC here

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Weakness From Military Aerospace & Europe Is Moderating

For the past many months UTC had been facing a mixed demand environment across its aerospace, building and industrial businesses. While demand from commercial aerospace sector remained strong, that from military aviation remained weak due to lower military spending from the U.S. government. Similarly, across the company’s building and industrial businesses, consisting of Otis, Carrier and Kidde/Chubb, demand was strong from North America and Asia, but was weak from Europe.

In the third quarter however, we saw that weakness from both military aerospace and Europe moderated. As a result, UTC’s aerospace sales rose from military aerospace sector and the company’s building and industrial sales rose from Europe. We figure that if the demand environment across both military aerospace and Europe continues to improve then results across UTC’s aerospace, building and industrial businesses will likely further grow.

Commercial Aerospace Drives Q3 Results

UTC’s sales growth in the third quarter was driven by its aerospace segments namely Pratt & Whitney, which makes airplane engines, and Aerospace Systems, which makes airplane components. Sales across both these segments rose as airplane manufacturers sourced engines and components at a higher rate. Airplane makers including Boeing and Airbus have been raising their production rates over the past few years to fulfill greater demand for commercial airplanes from airlines around the world. UTC is benefiting from these production rate hikes as its engine and airplane components are getting shipped at a higher rate. Driven by this trend, sales at both Pratt & Whitney and Aerospace Systems segments rose by over 5% per year in the third quarter, and operating profit at both these segments also rose in double-digits. [2]

Separately, for the first time in 2014, UTC’s sales from the military aerospace sector improved driven by Sikorsky. However, we will wait for this performance to sustain for a few more quarters before changing our macro view of the military aerospace sector. United States’ military spending continues to remain weak, and as UTC derives the majority of its military aerospace business from the U.S. government, we anticipate this weak spending from the government to continue to weigh on UTC’s military aerospace business. Having said this, we also anticipate that growth from commercial aerospace will likely outweigh weakness from military aerospace in UTC’s results for the foreseeable future.

UTC generates roughly 55% of its overall revenue from commercial and military aerospace sectors, with the former constituting a larger share in the company’s business.

Higher Residential HVAC Sales In The U.S. Lifts Building Segment Results

In UTC’s building and industrial businesses, which constitute the remaining roughly 45% of the company’s top line, results were driven by higher sales from the residential heating, ventilation and air-conditioning (HVAC) market in the U.S.. With the U.S. economy and the country’s housing market improving steadily, we figure this growth in UTC’s building sales from the U.S. will likely sustain. On the flip side, new equipment orders at Otis were flat from China in the third quarter. This indicates that the strong growth in sales that we’ve seen at Otis China over the past many years will likely moderate in coming months, and as China constitutes the largest market for Otis, this decline in sales growth from the country will likely weigh on the overall growth of Otis and UTC.

Looking ahead, we figure commercial aerospace and building markets in the U.S. will likely continue to be growth drivers for UTC. Emerging markets including China are uncertain at this time, as growth from these markets could slow in coming months as indicated by the flattish new equipment orders from China at Otis. While military aerospace and Europe seem to have bottomed out, but it is uncertain when recovery in these markets will pick up steam.

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Notes:
  1. UTC’s 2014 Q3 earnings form 8-K, October 23 2014, www.utc.com []
  2. UTC’s 2014 Q3 earnings presentation, October 23 2014, www.utc.com []