United Technologies (NYSE:UTX) may not be in the news a lot, but this is definitely a company that has a lot going on. The industrial conglomerate is in the process of acquiring Rockwell Collins (COL) and, more recently, the company launched the final bidding process for the potential sale of its approximately $3B safety and security business.
While the company does not get much attention from the financial media, UTX shares have performed pretty much in line with the broader market so far in 2018.
Looking ahead, however, I believe that UTX shares will likely outperform the market because it is well-positioned for 2019 and beyond. Additionally, the company's most recent operating results show that the bull case remains intact.
United Tech. reported better-than-expected Q2 2018 revenue and earnings a few months ago, so the most recent quarter was just more of the same. On October 23, 2018, the company reported Q3 2018 results that beat the top- and bottom-line estimates. It reported adjusted Q3 2018 EPS of $1.93 (beat by $0.11) on revenue of $16.51B (beat by $360M), which also compares favorably to the year-ago quarter.
The company reported strong top-line growth across the board, with one of its largest operating segments, Pratt & Whitney, leading the charge with YoY growth of 24% (13% organically).
Pratt & Whitney also reported a 7% YoY increase in operating profit with benefits seen in the Commercial aftermarket and in Military engines. During the conference call, management was encouraged by the Q3 2018 results, but it also anticipates for the operating segment to finish the current year on a strong note. To this point, management now expects for the operating segment's profit to hit the high end of the previously communicated range of $25M-75M.
And it gets better, as management also raised its full-year 2018 guidance for the entire company:
This is a meaningful increase, especially given the somewhat challenging backdrop. The takeaway from the Q3 2018 earnings and forward guidance is that the long-term bull case for this industrial conglomerate appears to be intact.
There are plenty of reasons to like United Tech., as the company heads into 2019, but, in my opinion, the Rockwell acquisition has to be close to the top of that list. The Rockwell acquisition will be a game-changer for United Tech., as previously described by management, and I believe that the assets will put the company in a great position for the future. It should also jumpstart the breakup process (more on this below).
Additionally, United Tech. has a great portfolio of businesses in industries that are key to the economy. Plus, these businesses have reported impressive results over the first nine months of 2018.
Source: Q3 2018 10-Q
And it is important to note the company has a strong balance sheet (i.e., solid current ratio, decent leverage, and a small amount of debt coming due in the near future) that should allow management to weather any near-term economic storms.
Let's also not forget that UTX shares are trading at attractive valuations based on trailing earnings and forward earnings estimates.
In addition, the company has several catalysts that should help propel the stock higher, with the two most notable examples being a potential breakup and the company's capital return story.
Many pundits, including Pershing Square's Bill Ackman (read his Q3'18 investor letter here), believe that it is only a matter of time before United Tech. announces a breakup. I tend to agree with this thought. I, however, believe that it is still a little premature to project exactly how much value will be created with a breakup (see this article for another SA author's thoughts on the value that could be unlocked with a breakup), but, in my opinion, the parts are worth way more than the whole.
A breakup will be a major catalyst for the stock, so investors should closely monitor any developments related to this topic. Management mentioned during the most recent conference call (linked above) that the strategic review should be released in mid-November, so investors should expect to hear something in the near future.
United Tech. recently increased its quarterly dividend by 5% (from $0.70 to $0.735), but, more importantly, the company still has room to raise its payout in the years ahead.
The company has not bought back very many shares lately, but it is due to the fact that management wanted to keep a strong balance sheet while it works to finalize the Rockwell acquisition. Makes sense, right? However, looking forward, I believe that buybacks will be a big part of the capital return story as the company still has a repurchase program of $2.2B. As such, United Tech. has a great capital return story to tell, especially if you look out a few quarters/years.
While the company has operating segments that should be able to effectively weather an economic downturn, i.e., Aero and Otis, a recession would obviously negatively impact United Tech.'s near-term business prospects.
Additionally, integration risk should be front of mind given the Rockwell acquisition.
United Technologies is in a great position to end 2018 and, in my opinion, the company's Q3 2018 results (and guidance) show that the bull case for this industrial conglomerate remains intact. Moreover, there are several catalysts in place that have the potential to create a significant amount of shareholder value over the next 12-18 months. As such, investors with a time horizon longer than a year should seriously consider adding UTX shares on any pullbacks.
Author's Note: United Tech. is a core holding in the R.I.P. Portfolio, and I have no plans to sell any UTX shares in the near future.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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Disclosure: I am/we are long UTX. 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.