United Technologies Pre-Earnings: Dollar Appreciation To Impact Revenue Growth

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United Technologies (NYSE:UTX) will announce its third quarter earnings Tuesday, October 20th. The industrial conglomerate is coming off a weak second quarter in which its sales declined by 5% annually on adverse foreign exchangeeffects, partially offset by the benefit of organic growth and acquisitions in 2015. With the third quarter release, we expect United Technologies (UTC) to post a marginal decline (in dollar terms) in its sales due to the pending sales of the Sikorsky business and a slowdown in Chinese economy. However, higher airplane engine shipments from Pratt & Whitney, and greater aviation spare parts shipments from UTC Aerospace Systems (UTAS) should offset the decline in sales from the slowing China market, and provide the much needed organic growth in revenues. The steadily recovering U.S. housing market will likely also support the company’s top line growth through higher sales at its Climate, Controls and Security (CCS) segment, which provides Carrier brand air-conditioners and Kidde/Chubb brand building fire and security systems.

See our complete analysis of UTC here

Higher Demand from the Global Commercial Aviation Sector Will Lift UTC’s Q3 Results

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UTC generates roughly half of its revenues (excluding revenues from Sirosky) from the global commercial aviation sector. Through its Pratt & Whitney segment, UTC is one of the largest engine suppliers to airplane manufacturers such as Boeing (NYSE:BA), Airbus and Embraer. The acquisition of Goodrich Corp. (in 2013) also positioned UTC as a leading global supplier of airplane components, such as landing gears and engine nacelles. Thus, today the company is firmly positioned in the global aviation supply chain. Additionally, airplane makers including Boeing and Airbus are currently hiking their production rates in response to greater demand for commercial airplanes from airlines. This in turn is driving grow of engine and airplane component shipments from Pratt & Whitney and UTAS, respectively.  In all, we figure these trends will drive strong growth in UTC’s second quarter revenues.

Furthermore the demand for military airplane engines from Pratt & Whitney has gone up and this should further boost the topline. However, UTC’s dependence on the government is much lower compared to its exposure to the commercial aviation sector, which is currently growing rapidly.

UTC’s Residential HVAC Systems Revenues To Grow, Albeit At A Slower Rate

Separately, the steadily growing U.S. housing market is driving sales of UTC’s residential heating, ventilation and air-conditioning (HVAC) systems. In the previous quarter, the company’s residential HVAC sales rose by 5% annually on higher demand from the U.S. housing market. [1] Generally, residential HVAC sales are a good indicator of the health of the U.S. housing market. This was highlighted in 2007, when UTC’s residential HVAC sales tanked, foretelling the upcoming downturn in the housing market. With residential HVAC sales currently continuing to rise in the U.S., we figure the country’s housing market will likely also continue to recover, supporting growth at UTC’s building businesses which include Otis and CCS. However, the growth in US residential HVAC will be offset by the decline in HVAC revenues from China, which is witnessing a marked slowdown in housing sector. This should also impact the Otis sales in China and we expect that overall revenues growth to be in lower single digits.

We currently have a stock price estimate of $105 for UTC, around 14% above of its current market price.

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Notes:
  1. UTC’s 2015 Q2 earnings presentation, July 21 2015, www.utc.com []