United Technologies: Confidence

| About: United Technologies (UTX)


Q3 earnings suggest UTX has turned the corner.

I discuss performance and results.

Should you take a stab here?

I kept a buy rating on United Technologies (NYSE:UTX) after a poor quarterly report in October 2015 and January 2016. But it was a disaster. Back in January, I had said that many investors likely had buyers' remorse in this bellwether tech and aerospace blue-chip name. Although it had made investors a fortune over the years, the stock had traded down to $85 in large part due to the broader market weakness, but also due to weakness in earnings. When the stock reached back well over $100 I downgraded to a hold. Thanks to a market rebound and general sector strength, UTX is back around the $110 mark. Should you take a stab here or sell your holdings? To better understand where the company is going, we need to be familiar with its operations and how it's performing.

If you are unfamiliar with the name, I invite you to review this piece as this article follows up with new performance data. While 2016 has been good for the stock price wise, operationally for the company things were less than stellar here in 2016, but things may be turning around as the headlines have been strong. Further, the election of Trump has bolstered the name. So is there still an opportunity here or has the stock run up too high? Well, United Technologies just reported strong Q3 earnings per share of $1.74 and net income attributable to common shareholders of $1.4 billion. These are up slightly versus the year-ago quarter, but these earnings beat estimates by a strong $0.10. What about sales? Well UTX saw sales of $14.35 billion, which was up 4.1% from last year. On top of that, these revenues beat expectations. The revenue figures surpassed estimates by $80 million.

The Q3 segment sales were a bit volatile. Otis sales were down slightly in constant dollars, coming in at $3.018 billion versus $3.043 billion in Q3 2015. In Climate Control and Securities, revenues were $4.415 billion, up from $4.279 billion in Q3 2015. The Pratt and Whitney sales were also up. They came in at $3.501 billion versus $3.23 billion last year. One area of growth has been in the Aerospace Systems segment. Here sales came in at $3.646 billion versus $3.457 billion in Q3 2015. Clearly, sales have been improving with the exception of in Otis, where for the year sales are essentially flat.

It comes down to expectations. Expectations have been quite low for UTX and so a beat is good news. However, a stock like UTX stands to do well with a Republican administration that will be focused on domestic production of good and a strong military. For the most part, there really isn't anything wrong with the company from a fundamental standpoint. It had a few weak quarters but here in 2016 things have been stronger. We issues with commercial aerospace sales when I initiated coverage, but its seems this has turned around. Gregory Hayes, President and Chief Executive Officer, stated:

"United Technologies delivered another quarter of strong financial performance. Organic growth across the aerospace units and solid cash generation across all businesses, even with continuing investments in the aerospace related ramp-up, give us high confidence in meeting our commitments to shareholders. Based on our year-to-date performance, we now expect slightly higher organic sales growth and we are raising the low end of our adjusted EPS outlook by ten cents and now expect 2016 EPS of $6.55 to $6.60 per share. We continue to focus on innovation and execution in each of our businesses and this focus is starting to pay off. Otis new equipment orders in the quarter increased 2 percent over the prior year at constant currency and grew 8 percent excluding China. Our Geared Turbofan Engine continues to perform exceptionally well and is now in service with eight operators around the world. Dispatch reliability on the GTF powered A320neo is 99.9% and fuel burn is meeting - and in some cases exceeding - our targets. Customer demand for the Geared Turbofan Engine also remains strong and our order book has grown to 8,400 engines, including announced and unannounced firm and option engines."

That last part is key. Execution in all business fronts strong customer demand has driven the company to amend guidance higher. Confidence remains high and the company revised its full-year guidance to $6.55 to $6.60 on strong sales. Further, 2016 free cash flow should be in the range of 90% to 100% of net income attributable to shareholders. The company expects to buyback $3 billion of stock in 2016. Given the recent run-up in share prices, I maintain a hold rating on the stock, but am excited to see how the company fares in 2017.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.