United Technologies Corporation

Transcription

1 January 29, 2015 United Technologies Corporation (UTX-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 09/21/2001 Current Price (01/28/15) $ Target Price $ Week High $ Week Low $99.17 One-Year Return (%) 4.71 Beta 1.12 Average Daily Volume (sh) 4,253,187 Shares Outstanding (mil) 912 Market Capitalization ($mil) $106,591 Short Interest Ratio (days) 1.90 Institutional Ownership (%) 81 Insider Ownership (%) 1 Annual Cash Dividend $2.36 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 4.4 Earnings Per Share (%) 7.3 Dividend (%) 8.6 using TTM EPS 16.8 using 2015 Estimate 16.6 using 2016 Estimate 15.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY United Technologies reported strong fourth quarter 2014 results as recurring earnings comfortably beat the Zacks Consensus Estimate. United Technologies has a diversified business mix and wide geographical presence to mitigate operating risks. The company also has a strong balance sheet with adequate liquidity to fuel its growth engine. Going forward, although the company expects organic growth to continue to accelerate, it trimmed its earlier guidance for 2015 due to strengthening of the US dollar and additional pension discount rate headwind. Global macroeconomic challenges and geopolitical tensions could also affect its profitability to some extent. Nevertheless, we maintain our long-term Neutral recommendation for the stock. Risk Level * Low, Type of Stock Large-Blend Industry Diversified Ops Zacks Industry Rank * 189 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,399 A 16,006 A 15,462 A 16,759 A 62,626 A ,745 A 17,191 A 16,168 A 16,996 A 65,100 A ,149 E 16,946 E 16,658 E 17,468 E 66,221 E ,961 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.28 A $1.65 A $1.63 A $1.67 A $6.23 A 2014 $1.41 A $1.84 A $1.82 A $1.88 A $6.95 A 2015 $1.51 E $1.82 E $1.82 E $1.90 E $7.05 E 2016 $7.75 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW United Technologies Corporation provides high-end technology products and services to the building systems and aerospace industries worldwide. Growth is attributable to acquisitions and the internal development of existing businesses. The operations of the company are primarily classified into two principal businesses: commercial and aerospace. Under its commercial business, the company has Otis and the UTC Climate, Controls & Security division which combined the former Carrier and UTC Fire & Security divisions. The aerospace business of the company consists of Sikorsky aircraft and the UTC Propulsion & Aerospace Systems, which includes UTC Aerospace Systems and Pratt & Whitney divisions. Earlier on July 26, 2012, United Technologies acquired Goodrich Corporation and combined it with the legacy Hamilton Sundstrand division to form a new division named UTC Aerospace Systems. With the successful integration of Goodrich Corporation, United Technologies now intends to eliminate the UTC PAS organizational structure. Consequently, Pratt & Whitney and UTC Aerospace Systems, which were both formerly under the PAS structure, will continue as stand-alone business units. The operations of the company are presently classified into five principal business segments as discussed hereunder: Otis; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems; and Sikorsky. Otis is the world s largest elevator and escalator manufacturing, installation and servicing company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and escalators as well as maintenance services for both its products and those of other manufacturers. Otis serves customers in the commercial and residential property industries around the world. Otis sells directly to the end customer, and to a limited extent, through sales representatives and distributors. UTC Climate Control and Security : Carrier is the world s largest manufacturer and distributor of HVAC and refrigeration systems. It also produces food service equipment and HVAC and refrigeration-related controls for residential, commercial, industrial and transportation applications. Carrier also provides installation, retrofit and aftermarket services and components for the products that it sells and those of other manufacturers in the HVAC and refrigeration industries. Carrier s products and services are sold under Carrier and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. Carrier sells directly to the end customer and through manufacturers representatives, distributors, wholesalers, dealers and retail outlets. Certain of Carrier s HVAC businesses are seasonal and can be impacted by weather. Carrier customarily offers its customers incentives to purchase products to ensure an adequate supply of its products in the distribution channels. UTC Fire & Security is a global provider of security and fire safety products and services. The company created the UTC Fire & Security segment in the second quarter of 2005 by acquiring Kidde and adding the Kidde industrial, retail and commercial fire safety businesses to the former Chubb segment. UTC Fire & Security provides electronic security products such as intruder alarms, access control systems and video surveillance systems and designs and manufactures a wide range of fire safety products including specialty hazard detection and fixed suppression products, portable fire extinguishers and other firefighting equipment. Services provided to the electronic security and fire safety industries include systems integration, installation, maintenance, and inspection services. UTC Fire & Security also provides monitoring, response and security personnel services, including cash-in-transit security, to complement its electronic security and fire safety businesses. In March 2010, UTX completed the acquisition of the GE Security business, a part of General Electrics Technology Infrastructure. GE Security business supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, video surveillance and access control systems. The GE Security business, incorporated Equity Research UTX Page 2

3 within the UTC Fire & Security segment, significantly enhances the segment s geographic diversity with GE Security s strong North American presence and increased product and technology offerings Pratt & Whitney is among the world s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney s Global Services provides maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services for large commercial engines UTC Aerospace Systems Hamilton Sundstrand is among the world s leading suppliers of technologically advanced aerospace and industrial products and aftermarket services for diversified industries worldwide. Hamilton Sundstrand s aerospace products, such as power generation, management and distribution systems, flight systems, engine control systems, environmental control systems, fire protection and detection systems, auxiliary power units and propeller systems, serve commercial, military, regional, business and general aviation, as well as space and undersea applications. Aftermarket services include spare parts, overhaul and repair, engineering and technical support and fleet maintenance programs. Hamilton Sundstrand sells aerospace products to airframe manufacturers, the U.S. and foreign governments, aircraft operators and independent distributors. Hamilton Sundstrand is engaged in development programs for the Boeing 787 aircraft, the Lockheed Martin F-35 Lightning II military aircraft and the Airbus A400M military aircraft, and has developed and delivered systems for the Airbus A380 aircraft. Hamilton Sundstrand is also the prime contractor for NASA s space suit/life support system and produces environmental monitoring and control, life support, mechanical systems and thermal control systems for the U.S. space shuttle program, the international space station and the Orion crew exploration vehicle. Sikorsky is one of the world s largest manufacturers of military and commercial helicopters and also provides aftermarket helicopter and aircraft parts and services. At present, major production programs at Sikorsky include the UH-60M Black Hawk medium-transport helicopters and HH-60M Medevac helicopters for the U.S. and foreign governments, the S-70 Black Hawk for foreign governments, the MH- 60S and MH-60R helicopters for the U.S. Navy, the International Naval Hawk for multiple naval missions, and the S-76 and S-92 helicopters for commercial operations. Sikorsky s aftermarket business includes spare parts sales, overhaul and repair services, maintenance contracts and logistics support programs for helicopters and other aircraft. Sales are made directly by Sikorsky and by its subsidiaries and joint ventures. Sikorsky is increasingly engaging in logistics support programs and partnering with its government and commercial customers to manage and provide maintenance and repair services. Equity Research UTX Page 3

4 REASONS TO BUY United Technologies is a diversified business conglomerate serving various end-markets such as aerospace, defense and commercial construction, which move according to their own cycles. This business mix and diversification allows the company to remain profitable even during tough economic times, delivering consistent earnings and dividend growth. The company has an experienced management team that is likely to capitalize on the continued global economic recovery and deliver sustainable earnings growth in future. United Technologies is also seeking potential acquisition targets to achieve aggressive revenue targets and regain its strong growth momentum. Economic recovery in Europe and China will likely have a strong positive impact on the company in the coming quarters. United Technologies has a strong aftermarket business. The company not only manufactures and sells primary products such as elevators, aircraft engines and helicopters but also sells spare parts and offers related services to keep those primary products running. The company s aftermarket services business is relatively stable compared to new product delivery, and it helps offset the negative impact of downturns in the new products market. United Technologies recently made some startling announcements to revamp its aerospace unit. These include an overhaul of its organizational structure in the aerospace business along with some key changes in the leadership positions within it. United Technologies anticipates that the streamlined organizational set-up would enable it to better serve its customers. In addition, the company expects that the strategic moves will further ensure a successful entry and production ramp-up of its Geared Turbofan engines to thwart intense competition from peers like General Electric Company, Honeywell International Inc. and Rolls Royce. United Technologies generates strong free cash flow. The cash flow allows management the opportunity to invest in product innovations, acquisitions and business development. The company continues to invest in innovative products delivering value to its customers and securing orders that will drive top line growth in future. Also the company expects to witness revenue synergies from the acquisitions of Goodrich and IAE in the long term. With continued investments to leverage the strong demand curve of the aerospace sector, the company s cash flow from operations less capital expenditures in 2014 was about 90% of net income attributable to common shareholders. All these augur well for its long-term growth. REASONS TO SELL The financial performance of the company depends on the conditions of the construction and aerospace industries. The company is also heavily dependent on the U.S. government s budgetary allocation for defense. A reduction in capital spending for the commercial aviation or defense industries could have a significant effect on demand for its products, which could in turn have an adverse impact on its financial performance. Its business may also be affected by government contracting risks. The company designs, manufactures and services products that incorporate advanced technologies. The introduction of new products and technologies involves risks, and the degree or timing of benefits may not be correctly anticipated. The company has also trimmed its guidance for 2015 due to strengthening of the US dollar and additional pension discount rate headwind. At present, United Technologies seems to be facing challenges on most fronts, and it would be prudent for investors to remain on the sidelines for some time. The company s international operations are subject to economic risks, and results of operations may be adversely affected by changes in economic conditions, foreign currency fluctuations and changes in local government regulation. Fluctuations in foreign currency exchange rates also affect the company s net investment in foreign subsidiaries and may cause instability in cash flows related to foreign denominated transactions. These undermine its long-term growth to some extent. Equity Research UTX Page 4

5 RECENT NEWS United Technologies Q4 Earnings Zoom, Outlook Trimmed December 31, 2014 United Technologies delivered stellar fourth-quarter 2014 results riding high on healthy margin improvement and six consecutive quarters of organic sales growth. The company reported fourth-quarter 2014 net income of $1,473 million or $1.62 per share, up from $1,463 million or $1.58 in the year-ago quarter. The reported earnings for the quarter included unfavorable one-time and restructuring costs. Excluding the one-time items, recurring earnings for the quarter were $1.88 per share, which comprehensively beat the Zacks Consensus Estimate of $1.61. For full year 2014, United Technologies reported net income of $6,220 million or $6.82 per share, considerably up from $5,721 million or $6.21 in the prior year. Total revenue for the fourth quarter edged up 1.4% year over year to $16,996 million. The increase in revenues was primarily driven by organic growth, partially offset by currency translation effects. The reported revenues missed the Zacks Consensus Estimate of $17,120 million. Total revenue for full-year 2014 improved to $65,100 million from $62,626 million in New equipment orders at Otis were up 12% from the year-earlier quarter, driven by growth in North America. UTC Climate, Controls & Security equipment orders increased 11% organically. Commercial spares orders increased 5% at UTC Aerospace Systems, while Commercial aftermarket sales were down 6% at Pratt & Whitney. Segment Results Otis reported revenues of $3,336 million in the fourth quarter, relatively flat year over year. Revenues at UTC Climate Controls & Security also remained unchanged year over year at $4,192 million. Pratt & Whitney revenues declined marginally to $4,023 million in the fourth quarter from $4,089 million in the year-earlier period. UTC Aerospace systems sales increased 4.1% to $3,594 million. Sikorsky sales stood at $2,086 million versus $1,897 million in the year-ago quarter. Operating profit of Otis decreased slightly to $674 million in the reported quarter from $684 million in the previous year. Operating profit at UTC Climate Controls & Security remained flat at $623 million. Pratt & Whitney s operating profit improved 17.9% year over year to $547 million in the reported quarter, while UTC Aerospace systems operating profit increased to $588 million from $517 million in the year-ago quarter. Sikorsky s operating profit increased 57.7% year over year to $298 million. Consolidated segment operating profit in the fourth quarter stood at $2,570 million versus $2,330 million in the prioryear period, reflecting an improvement of 10.3% with operating margin of 15.8% versus an operating margin of 14.6% in the year-earlier quarter. United Technologies recently made some startling announcements to revamp its aerospace unit. These include an overhaul of its organizational structure in the aerospace business along with some key changes in the leadership positions within it. The aerospace business of the company consists of Sikorsky aircraft and the UTC Propulsion & Aerospace Systems (PAS), which includes UTC Aerospace Systems and Pratt & Whitney divisions. Earlier on Jul 26, 2012, United Technologies acquired Goodrich Corporation and combined it with the legacy Hamilton Sundstrand division to form a new division named UTC Aerospace Systems. The operations of the company were classified into five principal business segments: Otis; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems; and Sikorsky. Equity Research UTX Page 5

6 With the successful integration of Goodrich Corporation, United Technologies now intends to eliminate the UTC PAS organizational structure. Consequently, Pratt & Whitney and UTC Aerospace Systems, which were both formerly under the PAS structure, will continue as stand-alone business units. Balance Sheet and Cash Flow The company continues to maintain a strong cash flow position. At year-end 2014, cash and cash equivalents were $5,235 million with long-term debt of $17,872 million compared with respective tallies of $4,619 million and $19,741 million in The company had a debt-to-capital ratio of 38.0%. Cash flow from operations aggregated $2,310 million for the quarter to bring the tally for 2014 to $7,336 million, compared with the respective tallies of $2,613 million and $7,505 million in the prior-year period. Capital expenditures were $557 million in the quarter. The company repurchased shares worth $1.5 billion throughout the year. Outlook With a strong performance in the quarter driven by robust growth dynamics factored by a healthy order backlog and organic growth, United Technologies expects healthy top-line growth. However, due to strengthening of the US dollar and additional pension discount rate headwind, the company has trimmed its earlier guidance for The company presently expects total revenue in 2015 to aggregate within $65 billion and $66 billion, slightly down from $66 billion and $67 billion anticipated earlier. Earnings are anticipated to vary within $6.85 $7.05, down from $7.00 $7.20 per share. Total capital expenditures are expected to be $1.7 billion in 2015, with share repurchase of $3 billion and acquisitions of approximately $1 billion. Equity Research UTX Page 6

7 VALUATION United Technologies current trailing 12-month earnings multiple is 16.8x, compared with the 26.6x average for the peer group and 18.6x for the S&P 500. Over the last five years, United Technologies shares have traded in a range of 12.3x to 19.0x trailing 12-month earnings. We maintain our Neutral recommendation on the stock as we expect it to perform in line with the broader market. Our target price of $ or 17.4x 2015 EPS, which is well within the historical range, factors in this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low United Technologies Corporation (UTX) Industry Average S&P Marubeni Corporation (MARUY) Mitsubishi Corporation (MSBHY) Honeywell International Inc. (HON) Sumitomo Corporation (SSUMY) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA United Technologies Corporation (UTX) Industry Average S&P Equity Research UTX Page 7

8 Earnings Surprise and Estimate Revision History Equity Research UTX Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of UTX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform %, Neutral %, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst: Supriyo Bose Lead Analyst: Supriyo Bose QCA: Supriyo Bose Reasons for Update: 4Q14 Earnings Update Equity Research UTX Page 9