What Can We Expect From United Technologies’ Q1 Earnings?

United Technologies (NYSE: UTX) is all set to report earnings for the first quarter of FY 2017 on April 26. The company has not been one to disappoint in the last few quarters. In fact, the conglomerate has managed to beat the consensus earnings estimate for eight quarters in a row. In the last quarter, the company saw growths in all of its segments except at Aerospace and Otis. In particular, Otis has suffered significantly last year, and we can expect the same to continue well into 2017, as well.

In terms of the full year guidance, management expects the adjusted earnings to be in the range of $6.30 to $6.60 per share on revenues of $57.5 to $59.0 billion. Furthermore, the company also reaffirmed its acquisition expectations of $1 billion to $2 billion, and free cash flow guidance in the range of 90-100% of the net income. Additionally, it also plans to repurchase shares worth $3.5 billion in 2017.

Probable Factors:

• Pratt and Whitney is expected to see higher deliveries of its Geared Turbofan (GTF) engines this quarter. In 2015, United Tech was facing significant delays on the GTF engines. This led to heavy additional costs at the program. However, the good news is that the company has identified the problems and is striving to fix them as soon as possible. In this respect, the company had significantly increased capacity last year, while improving yields and perfecting the process further. This year, the company expects to deliver a record 350 to 400 engines, with around 75+ deliveries expected to come in the first quarter itself.

• Otis business has suffered in the last few quarters on the back of a slowing global economy, and the consequent fall in infrastructural development the world over. The segment suffered primarily in China. Lower new orders and pricing pressures in the region are expected to persist throughout FY 2017. Consequently, we can see the top line suffer heavily in 2017. To put this into perspective, sales from China account for almost 20% of the total Otis sales.

• Aerospace has had a tough time last year. That said, the segment reported its strongest margin performance in the previous quarter in about three years. This suggests that the Nacelle headwind is now under better control, despite the significant mix drag that it entails. Hence, we could see a better earnings performance going forward. Further, the 2017 guidance calls for Military sales to grow, after a year in which sales were slow. Additionally, the company is confident that new product launches and increased innovation could propel recovery at the division.

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