Is The Market Pricing United Technologies Fairly?

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Trefis
UTX: United Technologies logo
UTX
United Technologies

United Technologies (NYSE: UTX) has had an amazing year in 2o17. Right from the very first quarter, the company was posting top and bottom line figures that managed to consistently beat the street consensus. This success was primarily a product of the company’s diversified business mix, coupled with a wide geographical presence, and a diligent execution of operational plans. These factors allowed it to remain profitable even when macro economic conditions worked against most businesses in the year.

This momentum spilled into 2018 as well, with all divisions managing to post positive organic growth in Q1. In general, the company is well positioned for future growth on the back of innovation investments, a robust backlog, and strategic cost-reduction efforts. That said, we believe that the stock is slightly overvalued in comparison to our price estimate of $122. To best explain our reasoning and thought process behind this, we have created an interactive dashboard that details our valuation method.

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In general, United Technologies earns its revenues from four main sources: Otis, UTC Climate, Controls & Security, Pratt & Whitney and Aerospace Systems. We believe the company is going to benefit from growth at all segments, barring Otis, consequently leading to overall top line expansion.

Otis’ revenues have trailed in the last few quarters as emerging markets, especially China, remain tough for the segment. That said, the company has booked positive revenue growth in the most recent quarter on heavier increases in businesses across North America and Europe. In the quarter, while new equipment sales increased by mid-single digit growth in North America, they were more than offset by a double-digit decline in sales in China. We expect operations in the region to take a toll on the overall business through most of the year, but expect the company to report positively going forward.

Pratt & Whitney was hurt through most of 2017 as it faced many problems in the production phase. That said, the segment worked hard through the year to make these problems a thing of the past, and consequently managed to deliver a record number of engines through the second half. This momentum has carried into 2018 as well. The segment managed to post a significant 9% organic growth in Q1. The figure was driven by robust military sales and increased GTF deliveries. We expect the segment to deliver a record number of engines in the year, which is bound to grow the top line even more.

Like Otis, Aviation has been struggling quite a bit as demand for commercial aircraft remained quite stagnant through 2017. In the latest quarter, Aviation was hurt by lower-than-expected OEM sales, which suffered on the back of declines in legacy program volume that more than offset growth on new programs. That said, the company is confident that things are expected to turn around for the segment going forward.

Climate, Controls & Security is expected to benefit in the year as the overall global economic climate begins to recover. In the latest quarter, the segment posted a massive 7% organic sales growth, representing the best quarter at the segment since it was formed about six years ago. CCS has brought to market more than 200 new products over the last two years, and is targeting a record number of new product introductions again in 2018.

As one can see, United Tech, like its competitors, is expected to post an overall good year in 2018. While we believe the stock price to be a little overvalued, it seems pretty clear that the business is poised for positive growth over the year.

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