What Can We Expect From United Technologies’ Q4 2016 Earnings?

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United Technologies (NYSE: UTX) is all set to report their fourth quarter earnings on January 25th. The company has managed to beat consensus estimates in the last seven quarters in a row. We can expect such momentum to drive revenues and earnings this time around as well. Analysts expect earnings to come in around $1.56 per share.

Furthermore, there appears to be quite a lot of optimism surrounding the defense sector at the moment. President Trump as vowed to increase spending in all branches of the military. This is the primary reason why shares of defense contractors like UTC have soared since the election. All the factors seem to be supportive of a solid Q4 earnings release.

Pratt & Whitney To Drive Revenues Going Forward

The latest innovation at Pratt & Whitney has stolen the show across the globe this year. The company’s Geared Turbo Fan engines have the potential to change the dynamics of the revenue structure going forward. As of the third quarter, the GTF engines have flown over 30,000 revenue hours and more than 20,000 takeoff and landings. Furthermore, the engine has also experienced a 99.9% dispatch reliability on the Airbus A-320 neo in the year. This is testament to the fact that the new technology is meeting, and in some cases, exceeding its key performance targets.

In 2016, VivaAerobus, a low-cost operator from Mexico, took delivery of its first GTF-powered aircraft. The final leg on the delivery flight was over 9.5 hours, which is a record flight time for an A-320. This was only made possible by the engine’s ability to reduce fuel burn in the aircraft by a whopping 18%. This news has been received very well by customers.

The company’s order book now stands at a significant 8,400 engines, positioning the company for long-term top and bottom-line growth. That said, the company has been plagued by slower than expected deliveries since Q3 last year. However, the good news is that the company is aware of this problem and is striving to fix it as soon as possible. The company has increased capacity while improving yields and perfecting the process.

Until the third quarter, the company had delivered about 80 engines. It intends to ship an additional 70 in Q4. That said, the ramp up in production is still significant. In 2015, UTC delivered only 14 engines. Going forward, it expects to ship around 350-400 GTF engines per year.

China Sales Are Likely To Dampen Otis Revenues In The Quarter

Otis sales have remained relatively flat this year with the positive effects of a higher service volume, improved productivity and lower commodity costs more than offsetting the continuing pricing pressures in China and EMEA.

Gains in market share over KONE in China has led to a 10% decrease in pricing. This shows that the company is willing to take a hit on margins in return for a gain in market share in key markets. At the  Morgan Stanley Laguna conference, United Tech stated that while its margins in China were around 20%, it was likely that adverse pricing pressures would persist throughout 2016 and the whole of 2017. The region represents $2.5 billion of UTC’s $12.5 billion Otis business, so it’s a key market that pressures margins.

As the market in China continues to suffer from a slowing economy, we can expect the revenues from the country to hurt the overall Otis revenues. Last quarter, new equipment sales in China were down 2% driven by an overall decline of about 13%. That said, North America displayed good demand with corporate sales up by almost 21%. Overall, service sales were up 3%, with continued solid growth in modernisation and repair, while maintenance sales were up slightly.

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