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United Technologies (UTX) Remains Focused On Key Priorities

Published 12/27/2017, 09:40 PM
Updated 07/09/2023, 06:31 AM

On Dec 27, we issued an updated research report on industrial goods manufacturer, United Technologies Corporation (NYSE:UTX) .

United Technologies serves 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. United Technologies also 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 the 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.

In order to fuel its growth momentum, the company remains focused on four key priorities — flawless execution, innovation for growth, structural cost reduction and disciplined capital allocation. United Technologies has also revamped 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 (NYSE:GE) , Honeywell International Inc. (NYSE:HON) and Rolls Royce (LON:RR).

With a diligent execution of operational plans, the company has outperformed the industry with an average year-to-date return of 16.4% against a decline of 4.5% for the latter. Moreover, the acquisition of Rockwell Collins (NYSE:COL) is likely to create an industry behemoth with an unrivalled competitive advantage. The transaction 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 in the world. 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.



Incorporating its improved expectations for organic sales growth in the near future, United Technologies raised its earlier guidance for 2017. Adjusted earnings are currently anticipated to lie within the $6.58-$6.63 per share range compared with the previously estimated range of $6.45-$6.60. Additionally, the company raised its revenue guidance for 2017 from $58.5-$59.5 billion to $59-$59.5 billion (estimating an organic growth of 3-4% year over year). Despite a challenging macroeconomic environment and continued investments in the aerospace segment, the company expects to generate significant cash from operations to reward shareholders with a risk-adjusted return through share repurchases and dividends.

However, with more than 8,000 employees, United Technologies has a considerable presence in the U.K. Consequently, the company is susceptible to high operating risks following the Brexit referendum. 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. Furthermore, 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.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. A better-ranked stock in the industry is 3M Company (NYSE:MMM) , which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

3M has a long-term earnings growth expectation of 10.2%. It has surpassed estimates thrice in the trailing four quarters with an average positive surprise of 2.5%.

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3M Company (MMM): Free Stock Analysis Report

Honeywell International Inc. (HON): Free Stock Analysis Report

United Technologies Corporation (UTX): Free Stock Analysis Report

General Electric Company (GE): Free Stock Analysis Report

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