United Technologies Faces Tough Macro But Is Still Worth $93

by Trefis Team
United Technologies
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United Technologies (NYSE:UTX) is facing challenges to its short-term growth from multiple sources. First, the slowdown in Europe is causing a decline in the company’s sales from the region. Its effect is getting compounded by a stronger U.S. dollar vis-a-vis the euro. Second, slowing growth in Asia-Pacific region, particularly China and India is impacting its top line growth. And third, the proposed U.S. Defense spending cuts of $500 billion over the next 10 years are expected to impact sales in its Aerospace Systems and Sikorsky Helicopter divisions. All of these factors combined together are posing a severe challenge to United Technologies’ (UTC) growth over the short-term.

On the brighter side, UTC’s recent acquisition of Goodrich will allow it to take advantage of the growing commercial airplane industry, and help offset the impact of these factors.

We currently have a stock price estimate of $93 for the company, approximately 15% above its current market price.

See our complete analysis for the company here

Slowdown in Europe

The slowdown in Europe on account of its sovereign debt crises and the accompanying austerity measures have resulted in a decline in UTC’s sales in the region. And, as Europe accounts for nearly 25% of the total company sales, [1] the decline in Europe has had a significant impact on the overall UTC sales. The effect has been compounded by a stronger U.S. dollar vis-a-vis the euro, which has acted in two ways: First, in the form of foreign exchange losses when sales in euro are converted to dollar, and second, by making U.S. manufactured goods expensive in Europe. Going forward, as no clear solution is still in sight to resolve the euro crises, it is expected that the region shall continue to impact sales growth of the company.

Slowing economic growth in Asia-Pacific and U.S. defense spending cuts

Also, slowing economic growth in Asia-Pacific, particularly in China has impacted sales growth of UTC. The attempts of the Chinese government to control inflation levels by maintaining high interest rates, has impacted the country’s high-end real estate sector. And this sector constitutes more than 50% of Otis’ sales in China. As a result, sales in Otis elevators business division of UTC declined by 5.2% y-o-y in the quarter ended June 30, 2012. [2]

The Asia-Pacific region constitutes approximately 20% of the total UTC sales and is the primary driver for growth of the company. Thus, low-levels of growth in this region over the near term shall impact growth rates for UTC.

In addition, the U.S. defense spending cuts of $500 billion over the next 10 years are expected to impact military sales in the Aerospace Systems and Sikorsky Helicopter business divisions of the company.

Goodrich acquisition to help the company offset these challenges

On the other side, UTC’s recent $16.5 billion acquisition of Goodrich Corp. provides the company not only an expanded product portfolio to serve the aerospace industry, but also all major aerospace industry players including Boeing, Airbus, Bombardier among others, as existing clients of Goodrich. Thus, UTC will be able to take a larger share of the growth anticipated in the commercial airplane industry and help partially offset the challenges of a weak global economic environment and U.S. Defense spending cuts.

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  1. 10-K 2011, February 9 2012, www.utc.com []
  2. 10-Q Q2 2012, July 30 2012, www.utc.com []
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