UTC Earnings Preview: Local Business Likely Drove Earnings As China A Possible Headwind

United Technologies (NYSE: UTX) is scheduled to release its Q4 earnings on January 27th. The company posted weak sales figures last quarter, with revenues down almost 6%.  Five percentage points of the decrease were the result of currency effects, with the remaining point the result of organic events. Sales fell primarily due to a delay in engine delivery at Pratt & Whitney, as a shift to a new material logistics center disrupted the manufacturing process. However, the company maintains that this was a one off occurrence and that things are on track in Q4. UTC expects to achieve mid single digit organic growth in all its segments going forward. ^[1]

Financial Highlights of Q3:

• The company recorded $13.8 billion in sales, with segment operating margins of 17.6%.
• EPS for the quarter was posted at $1.61.
• The company managed to reduce operating costs by 5% in the quarter, in an on going program to try and improve efficiency.

The consensus EPS estimate expected this quarter stands at $

See our complete analysis of UTC here

Economic Problems in China and Europe Could Prove to be a Headwind to Growth there:

Like most corporations, UTC too is feeling the pinch of the trailing Chinese economy. In the previous quarter, the company faced heavy declines in sales from the country as their economy shifts away from an economy based on manufacturing capabilities to a (more sustainable) services oriented economy. The company has witnessed that the growth in fixed investment here has reduced considerably in the recent past. There was a fall in business across all segments in the quarter. For instance, Otis orders were down by almost 19%, while orders at CCS were down by 8% (both figures are reported on a constant currency basis).

The company has forecasted that business in China will be down 10-15% in the coming year. This seems likely considering how macro economic factors are shaping conditions there at the moment. Recently, it was reported that China’s economy grew at 6.9% in 2015. This happens to be its lowest growth figure in about 25 years. ^[2] Furthermore, development and housing projects have reduced considerably over the last year or so. This will definitely have an impact on UTC’s Otis and CCS segments going forward.

For the current year, China’s government has set a target of 6.5% growth, which is indication of a further slowdown in the near term.

On the flip side, however, business in North America grew heavily last quarter, with Otis witnessing a 47% growth in orders spurred partly by a large order from the Hudson Yards project in New York City. New equipment orders were also up by almost 20% in the quarter. This trend could possibly continue into the current quarter as well, as North American commercial construction figures are at their strongest since 2001, according to John Lang. ^[3]

Could See Good Growth Figures in Aerospace Going Forward:

Orders in the aviation sector are at record high levels currently. If this is any indicator, we could see UTC benefiting from this soaring demand. However, this also brings up questions of whether the company can cope well with the heavy influx of orders. As mentioned previously, the Hartford based company faced some issues in delivering engines in the previous quarter. However, the management has assured investors that this is just a one off incident. Despite the reassurance, it is a risk that the company faces. Defaulting on orders is a common problem in the aviation space, primarily due to the heavy scale of operations. That being said though, UTC is increasing investments to ensure that such situations don’t arise going forward. Furthermore, the management feels confident that orders are going to increase even more in the near future due to the rising revenue passenger mile (an indicator of passenger demand). Additionally, low fuel costs are reducing ticket prices, which is increasing air travel demand.

In addition, UTC is undergoing changes to reduce costs and restructure their business. In a recent statement, management announced that the company is focusing on trying to streamline their business model through various means. Most notably, the divestiture of Sikorsky (concluded this quarter) and the multi-year restructuring program worth $1.5 billion. ^[4] The Sikorsky divesture would reduce UTC’s exposure in the military business quite a bit, which has been trailing in the past few quarters. Exiting the helicopter business will allow the company to focus on segments that represent a higher volume of sales. Apart from this, the restructuring program that is poised to be completed by the end of 2018, aims to reduce costs and increase efficiency. It is estimated that the company can hope to save close to $900 million annually once the restructuring is complete.

The consensus EPS estimate for the quarter stands at $1.50, while the company estimates EPS for the year to stand between $6.20 to $6.30.

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More Trefis Research

1. UTC Q3 2015 Earnings Transcript, www.seekingalpha.com [↩]
2. China’s Growth Slows to 6.9% in 2015, www.ibtimes.com [↩]
3. UTX: Still More Work To Do, www.seekingalpha.com [↩]
4. Will UTX Beat Earnings on Reforms, www.nasdaq.com [↩]