Low Revenues To Hurt United Technologies (UTX) Q3 Earnings?

Diversified conglomerate United Technologies Corporation (NYSE:UTX) is scheduled to report third-quarter 2017 results before the opening bell on Oct 24. The company is likely to report lower revenues in the quarter due to a challenging macroeconomic environment.

This, in turn, is likely to result in lower earnings for the quarter.

Top-Line Woes

The financial performance of United Technologies depends largely 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 is likely to have a significant effect on the demand for its products.

United Technologies relies on suppliers, including third-party contract manufacturing and commodity markets to secure raw materials, parts, components and sub-systems. This exposes the company to market price volatility and availability risks. A disruption in deliveries from suppliers, capacity constraints, production disruptions, price changes, or decreased availability of raw materials or commodities is likely to have an adverse effect on its ability to meet delivery schedules and thereby increase operating costs. These headwinds look all the more potent with the strengthening of the U.S. dollar.

The Zacks Consensus Estimate for UTC Climate Control and Security segment revenues is currently pegged at $4,566 million, significantly down from $4,712 million reported in the second quarter. Revenues from Otis and Pratt & Whitney are also expected to be sequentially low with respective estimates of $3,075 million and $3,661 million compared with reported revenues of $3,131 million and $4,070 million in the prior quarter.UTC Aerospace Systems’ revenues are likely to be $3,619 million compared with $3,640 million in the previous quarter.

Other Key Factors

During the quarter, United Technologies inked a definitive agreement to acquire Iowa-based avionics firm, Rockwell Collins (NYSE:COL), Inc. The acquisition is expected to offer United Technologies a bigger clout in the industry and increase its bargaining power as it would emerge as one of the largest aircraft equipment manufacturers. The combined company would be better suited to meet the evolving global customer needs. With complementary products, the combination is likely to yield operating synergies through lower operating costs and more opportunities to cross sell the products. United Technologies expects the merger to be accretive to adjusted earnings per share after the first full year of combined operations with synergies to the tune of more than $500 million.

However, our proven model does not conclusively show that United Technologies is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -0.24% with the former currently pegged at $1.68 and the latter at $1.69. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: United Technologies has a Zacks Rank #4 (Sell).

Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Applied Materials, Inc. (NASDAQ:AMAT) has an Earnings ESP of +0.19% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Franklin Resources, Inc. (NYSE:BEN) has an Earnings ESP of +0.56% and a Zacks Rank #2.

KEMET Corporation (NYSE:KEM) has an Earnings ESP of +7.46% and a Zacks Rank #1.

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