United Technologies Displays Bright Prospects Amid Risks

On May 27, we issued an updated research report on United Technologies Corporation (NYSE:UTX) .

In the past three months, this Zacks Rank #3 (Hold) stock has gained 4.6% against the industry’s decline of 1.8%.

Existing Scenario

United Technologies has been gaining from strength in commercial and military aftermarket businesses. With high defence spending and strong orders in the United States, prospects of the company's aerospace business look bright. Also, ramp up in Geared Turbofan (GTF) engine production along with strength in GTF aftermarket business, continued investment in innovation and launch of new products, particularly at the Carrier segment, are likely to drive revenues of the company's commercial business.

Also, United Technologies intends to become more competent on the back of meaningful business acquisitions. In this regard, the buyout of Rockwell Collins (NYSE:COL) (completed in November 2018) is worth mentioning. Notably, this deal is not only expected to fortify the company's existing product portfolio but also aid in launching innovative solutions for the aerospace customers. Moreover, it noted that Collins Aerospace Systems segment is on track to deliver about $150 million of cost synergies in 2019.

In addition, United Technologies intends to separate its existing businesses into three entities. If the idea gets required approvals, the entities will be able to innovate, provide better customized solutions to customers and create greater value for shareholders.

However, rising costs of sales remain a concern. We believe, if unchecked, higher costs and operating expenses will prove detrimental to United Technologies’ margins and profitability. Notably, in the first quarter of 2019, the company’s cost of sales was up 21.5% year over year on account of higher input costs, including commodities, tariffs and logistics expenses. Also, it is experiencing softness in its equipment orders at Carrier segment due to lower transport refrigeration orders.

Stocks to Consider

Some better-ranked stocks from the same space are Carlisle Companies Incorporated (NYSE:CSL) , Federal Signal Corporation (NYSE:FSS) and Macquarie Infrastructure Company (NYSE:MIC) . While Carlisle sports a Zacks Rank #1 (Strong Buy), Federal Signal and Macquarie carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Carlisle delivered average earnings surprise of 19.07% in the trailing four reported quarters.

Federal Signal pulled off average positive earnings surprise of 21.75% in the previous four reported quarters.

Macquarie’s earnings surprise in the last reported quarter was 12.00%.

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