Commercial Aerospace Will Likely Lift UTC’s Results Despite Slowing China and Uncertain Europe

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United Technologies

United Technologies (NYSE:UTX) will announce its fourth quarter and full year 2014 results on Tuesday, January 27. The industrial conglomerate is coming off a good third quarter in which it posted healthy growth on higher demand from the global commercial aerospace sector, and a recovery in sales from Europe and the military aerospace market. In the fourth quarter, we anticipate that higher airplane engine and component shipments to the commercial aerospace market will continue to lift United Technologies’ (UTC) results. However, we will be watching if UTC is able to sustain the recovery in its sales from Europe and the military aerospace market, as both these markets still remain weak.

For full year 2014, UTC forecasts its revenue to rise by 4% annually to $65 billion, and its earnings to rise to $6.75-6.85 per share, from $6.21 per share in 2013. [1] The company’s performance in the first three quarters has kept it on track to achieve these targets, and we figure that the fourth quarter results will allow UTC to meet these full year revenue and earnings targets.

We currently have a price estimate of $121 for UTC, slightly ahead of its current market price.

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See our complete analysis of UTC here

Commercial Aerospace Will Drive Growth In UTC’s Results

UTC generates approximately a third of its total revenue from the global commercial aerospace sector. 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. As a result of this well-established position in the global commercial aviation supply chain, UTC is seeing its engine and component shipments rise as airplane manufacturers – Boeing (NYSE:BA) and Airbus – are hiking their production rates. In the third quarter, UTC’s sales from commercial aerospace rose by 9% annually driven by this trend. [2] In the fourth quarter, we expect commercial aerospace to continue to drive growth in the company’s results.

UTC generates another 20% of its revenue from the military aerospace sector, which consists of primarily U.S. military spending. For the past 2-3 years, declining U.S. military spending weighed on UTC’s military aerospace sales. However, in the third quarter, the company’s sales from military aerospace rose marginally, though U.S. military spending – which constitutes the bulk of UTC’s military aerospace business – remains weak. So, in the fourth quarter, military aerospace will likely temper growth from commercial aerospace in UTC’s results.

Mixed Building Markets

UTC generates the remaining – roughly 45% – of its total revenue from the global building and industrial markets. The company serves these markets through its Otis elevators, Carrier air conditioners and Kidde/Chubb fire and security systems. These businesses have posted moderate growth in the first three quarters of 2014, driven by higher demand 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 steadily improving, we figure this growth in UTC’s building businesses from the U.S. will likely sustain in the fourth quarter. However, the slowing Chinese real estate sector, which is the largest market for Otis, will likely weigh on growth in these businesses. The uncertain macro environment in Europe could also weigh on UTC’s building businesses in the fourth quarter.

All in all, UTC’s fourth quarter results will likely grow, driven by the commercial aerospace sector and U.S. building markets, partially offset by weakness in military aerospace, the slowing Chinese real estate market and uncertain European building markets.

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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 []