Industrial conglomerate, United Technologies (UTX), posted mixed first-quarter results that showed strength in its residential HVAC and commercial aerospace businesses but weakness in its Otis elevator division. Though we weren't pleased by order trends in China and Europe, we are sticking with our fair value estimate for the firm.
The firm's net sales fell 2% in the period thanks to divestitures and currency headwinds, though organic sales did edge up a meager 1%. The firm's segment operating margin dropped 10% mainly because of higher research and development costs, but on a reported basis, the company's operating margin came in at 13.7% (versus 13.3% in the year-ago period). Earnings per share advanced 24%, to $1.31 per share, in the quarter thanks primarily to a boost in other income, lower interest expense, and a lower tax rate - all lower earnings quality items. Consensus estimates for the period were at $1.21 per share.
United Tech's new equipment order trends weren't as robust as that of previous periods, but the firm saw strength in its residential HVAC business (up 10%) and commercial aerospace, which held the line on substantial order increases from the same period a year ago. Interestingly, the strength in the company's HVAC business further supports our thesis that the domestic housing market is firming, a view that was reinforced yesterday by D.R. Horton's (DHI)'s strong home orders and low cancellation rate. The only weak spot as it relates to new equipment orders at United Tech was at Otis, where orders dropped 9% from the same period a year ago due to a slow start to the year in China.
Looking ahead, United Tech reaffirmed its earnings-per-share outlook for the year of $5.30 to $5.50 (flat to up 4%), and we think this range is certainly achievable. Commercial aerospace performance (Pratt & Whitney), augmented by its recent acquisition of Goodrich, should be a key driver to the jet-engine maker's earnings trajectory in coming periods. Still, we prefer companies in the aerospace supply chain and a key derivative play on United Tech's commercial aerospace success, EDAC Tech (EDAC).
Additional disclosure: EDAC is included in our Best Ideas portfolio.