United Technologies Earnings: Stronger Dollar Offsets Growth

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United Technologies

United Technologies‘ (NYSE:UTX) revenue and profit rose marginally in the fourth quarter, as a stronger dollar slashed gains from the company’s international sales growth. United Technologies (UTC) generates more than 60% of its total sales from international markets, so a stronger dollar meant that organic growth from these markets translated to lower absolute revenues. Overall, UTC’s fourth quarter top line rose by 1% annually, as 4% organic growth was partially offset by the stronger dollar. [1]

For the full year 2014, UTC’s top line rose to $65.1 billion from $62.6 billion last year, and its earnings rose to $6.82 per share from $6.21 per share in 2013. [1] Given the challenging macro environment that UTC faced in 2014, this revenue and profit growth is impressive. However, a strengthening dollar will make it harder for UTC to sustain strong growth in its results in 2015. The company anticipates that the recent appreciation in the value of dollar against many global currencies will reduce its 2015 top line by $1.5 billion and its 2015 earnings by 24 cents a share. To counter this impact, UTC has said that it will accelerate cost cutbacks and buy back more shares in 2015. In all, the company now expects to post earnings in the range of $6.85-7.05 per share in 2015, down from the $7-7.20 per share it guided earlier. [2]

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

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See our complete analysis of UTC here

Declines From Military Aerospace Moderating

UTC generates about 55% of its total sales from the global aerospace markets – commercial as well as military. Though the commercial aerospace market has been booming, driven by rising demand for new airplanes from airlines, the military aerospace market has remained weak in the U.S. due to lower government spending. Surprisingly, in the fourth quarter, UTC’s sales from the military aerospace market rose sharply. The company attributed this rise in its military aerospace sales to the timing of shipments. However, in our view, the decline seen in the military aerospace market over the past few years is moderating, as the government’s military spending is bottoming out. At the same time, growth from the global commercial aerospace market is likely to sustain for the foreseeable future, driven by rising production rates at major airplane makers such as Boeing and Airbus. So, UTC, which is a key supplier of Pratt & Whitney airplane engines and airplane components, will likely see its sales from commercial aerospace rise in the coming quarters.

Recovering U.S., Slowing China

UTC generates the rest of its sales – roughly 45% – from the global building and industrial market, by selling Otis elevators and escalators, Carrier heating, ventilation and air-conditioning (HVAC) systems, and Kidde/Chubb fire and security solutions. In this segment, growth in the company’s fourth quarter results was driven by the U.S. residential HVAC market. Looking ahead, however, slowing growth from China, which is the largest market for Otis, could moderate the company’s overall growth. In 2014, for instance, Otis’ new equipment orders from China rose by just 6% annually. This is a sharp decline from the double-digit growth rates that have been seen from the country for most of the last decade. However, as China constitutes just about 6% of UTC’s total sales, the impact of slowing growth from the country will be limited. [3]

In all, UTC anticipates its 2015 top line to be in the range of $65-66 billion, compared to $65.1 billion in 2014. [2] This relatively flat top line guidance reflects the uncertainty that UTC faces in the military aerospace market and Europe. This top line guidance also takes into account the impact from a stronger dollar. On the bright side, however, growth from commercial aerospace and the U.S. economy will help counter these negative trends.

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Notes:
  1. UTC’s 2014 Q4 earnings form 8-K, January 27 2015, www.utc.com [] []
  2. UTC’s 2014 Q4 earnings presentation, January 27 2015, www.utc.com [] []
  3. UTC’s 2014 Q4 earnings transcript, January 27 2015, www.utc.com []