United Technologies (UTX) has had to face the global challenges most of the large conglomerates have had to face this year. When one's market is global and certain regions struggle, the company is going to be challenged in that region. Having cut back on expectations for the second half of this year like many of the biggest companies have had to do, I would think the stock would end up just moving sideways. But the stock looks like it is going to prove me wrong and a couple analysts are also bullish on the stock. This possible bullish move could create a nice income opportunity for us!
Analysts are Bullish on UTX
JP Morgan picked up United Technologies again with an Overweight rating and a price target of $98. This gives plenty of room for the stock to move. The reason it picked the company up again is because it sees it as a perfect entry point with adequate valuation and good growth potential. The Goodrich acquisition was a great catalyst for long term growth. Another analyst, Jefferies, reiterated a Buy rating on UTX but lowered its price target to $88 to adjust for United Tech's readjustment of 2012 expectations. Since UTX is trading in the upper 70's, both analysts have great faith in the direction the company is moving and future growth.
2Q Numbers Sound the Same
With the European economy, declining jet part sales, and elevator revenue, the company's had no choice but to announce that earnings will be flat through the rest of the year. Singing the same song as most of the major companies this year, United Tech beat earnings and came up short in revenues. Earnings of $1.62 per share from continuing operations beat the analysts' average forecast of $1.41 Revenue fell 4.6 percent to $13.81 billion from $14.47 billion and below Wall Street estimates of $14.44 billion. It is now stepping up cost cutting measures like most of the companies that are lowering forecasts as a result of the difficult economic conditions in Europe. The company posted declines in revenue and net income in the previous quarter on a year-over-year basis due to the impact of slowing growth in construction industry of China and higher restructuring costs.
These numbers are not surprising and are expected this quarter from most companies. Since I believe they have been factored into the market, I do not see any long term affect upon the company. Investors are looking for earnings increases and the company has performed there. As it continues cost cutting measures it should continue to perform. Add the recent purchase of Goodrich and one can understand why long term prospects look good.
Goodrich is a Good Move (Long Term)
UTX's purchase of Goodrich Corp for $16.5 billion in cash also involves taking on the $1.9 billion in debt and would be finance 25% of the acquisition with equity while financing the rest. This move will be good for United Technologies long term but may not see any benefit short term. United Tech will have to focus on tightening its ship to deal with the new debt. This may include cut backs like (M & A) for a bit as it figures out where it can save a $1 billion a year for a couple years. The merger is expected the save both companies $300-$500 million in costs yearly. United Tech should add about $8 billion in sales a year also. Investors should expect a couple years of running lean to address the new debt and then see the numbers work in its favor down the road. Since Goodrich makes landing gears and other aircraft components, this will build on United Tech's current Pratt & Whitney jet engine and Hamilton Sundstrand aircraft electronics arms thus increasing what it can sell to jet makers Boeing Co (BA) and Airbus.
The stock has been in a trading channel (71.5-76.5) since the end of May but it looks like it has just broken out of the channel. One healthy point I would like to make about the consolidation that we have seen in the channel trading is that the RSI continued to hover around the '50' mark and this is a healthy level to be at. Usually when no movement is taking place one can observe lower volume amid weaker trading, but we do not see that here. The MACD supported this strength as the Histogram stayed above '0" and the MACD MA's continue to gradually go higher until it crossed over the middle line with the stock's push through the 50 day MA on increasing volume. It is early, but it looks like United Technologies might be giving all the right signs for a move up.
The Option Play
The stock is presently trading at 77.48 and all indications point to a push up for the stock. So I am going to place an income trade in this direction but I am going to give it plenty of protection against time decay in case the stock tries to reverse.
- Buy a January 2013 call with a strike of '75.00' (priced at $3.95)
- Sell a January 2013 call with a strike of '77.50' (priced at $2.70)
- Net Debit to Start: $1.25
- Maximum Profit: 1.25
- Maximum Risk: net debit
- Maximum Length of Play 5 months
Reasoning behind the Trade
- Looks like the stock is getting ready to move up.
- Analysts have a buy rating on the stock.
- Goodrich deal is looked upon as long term favorable acquisition.