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Investment Overview for United Technologies (NYSE:UTX)
- Pratt and Whitney EBITDA margins: This is a promising business for UTC as the company is investing in researching and developing new state of the art aviation engines. The company has a contract with the U.S. Air Force to develop the F135 engine for its F35 jets while also developing a liquid fuel J-2X engine to support NASA’s vision for space exploration. If it is able to meet these challenges, it will be able to command a premium for its products, leading to an increase in Pratt and Whitney EBITDA margins. Should this occur, and margins exceed 25% versus our forecast of around 18% by the end of the Trefis forecast period, there could be a potential upside of nearly 10% to the current price estimate.
Otis EBITDA margins: With local competitors in international markets trying to compete against Otis on the basis of price, Otis' profitability might take a dip if it is not able to lower its costs. If that happens, Otis' EBITDA margins could fall from around 22.2% to about 20% by the end of the forecast period, thus providing a downside of about 4% to the Trefis price estimate.
United Technologies (UTC) is a diversified industrial conglomerate. The company's brands and products include Carrier heating and air conditioning systems, Otis elevators and escalators, Kidde/Chubb fire and security systems, Pratt & Whitney aircraft engines, Goodrich aerospace systems and components, and Sikorsky helicopters. The company's various businesses are leading players in their respective categories. UTC conducts its business through about 4,000 locations in 71 countries and generates over 60% of its revenue from outside the U.S., including U.S. exports.
UTC's business is essentially aligned with the global aerospace sector and global building markets. The company's products are sold to both retail and commercial customers. The U.S. government is also a large customer for UTC, buying its Sikorsky military helicopters, aircraft parts and engines, among other products.
UTC invests large amounts in research and development, spending over of $2.5 billion each year on R&D. The company also conducts customer-funded research of around equal value.
Pratt and Whitney's Geared Turbofan Engine
Constant innovation in aircraft engines is demanded by both airplane makers and airlines, as fuel costs constitute the largest expense head for airlines. Consequently, airplane engine makers such as Pratt & Whitney have to constantly improve the fuel efficiency of their engines. Over the last few years, Pratt & Whitney has been able to develop the Geared Turbofan Engine (GTF), which has been promised to be 10-15% more fuel efficient than existing engines on regional and single-aisle aircraft.
This engine gas been selected as the exclusive engine for Mitsubishi Regional Jet (MRJ), Bombardier CSeries and Embraer’s second generation of E-jets, and as an engine option on the Airbus A320neo and the Russian Irkut MC-21.
We figure this GTF engine will be a major growth driver for Pratt & Whitney in coming years.
Otis' leading position will allow UTC to capture growth in the global elevator market
Otis is the world's largest elevator and escalator manufacturer with a very strong brand. The company is also the market leader in China, which is the world's largest as well as the fastest growing elevator market. As the demand for elevators and escalators rises, especially from the emerging countries, Otis should manage to capture a significant portion of this demand.
Rising Air Passenger Traffic
Global airline passenger traffic is rising driven by a steadily growing global economy, rising trade and globalization. Forecasts from Boeing anticipate the global airline passenger traffic to grow by around 5% per year through the next two decades.
The rising passenger traffic has also lifted airline profits, enabling them to place orders for new airplanes. According to figures cited by UTC, driven by this rising global air passenger traffic, approximately 35,000 new commercial airplanes will be delivered to airlines over the next 20 years, up from around 19,000 commercial airplanes that were delivered to airlines over the past 20 years. This tremendous growth in commercial airplane deliveries will benefit both Pratt & Whitney and UTC's Aerospace Systems' segment.
As large number of people migrate from rural areas to cities in the less developed regions of the world, demand for residential and commercial buildings along side other physical infrastructure will rise. As UTC’s building products enable construction of new buildings we figure the company has a tremendous growth opportunity on its hands. The key building products of UTC include Otis elevators and escalators, Carrier heating, ventilation and air-conditioning (HVAC) systems and Kidde/Chubb fire prevention and security systems. Additionally, as these products are leading players in their respective segments, we figure the company will bag a large share of the growth that is anticipated in the global building market.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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