United Technologies (UTX) reported solid third-quarter results Wednesday that showed strong order growth despite a challenging market environment. We are maintaining our $100 fair value estimate.
The conglomerate’s revenue advanced 9% during the period (6% organic) thanks to continued expansion across all six of its business segments. Order growth was also solid during the period: Otis (up 19%), commercial HVAC at Carrier (up 11%), commercial spares at Hamilton Sundstrand (up 24%) and Pratt & Whitney’s large engine business (up 3%). United Tech’s operating margin was slightly lower than last year’s quarter due to higher research and development expenses. However, the firm’s earnings-per-share and net income advanced 13% and 11%, respectively, from the same period a year ago. Cash flow generation was solid, and management indicated that free cash flow would exceed net income for the year, revealing high earnings quality.
United Tech raised its full-year earnings-per-share expectation to $5.47 from the range of $5.35 to $5.45 previously (up 15% from 2010) thanks to lower interest costs and taxes and higher profits from Sikorski. With order growth still going strong and management focused on aerospace growth (via its recently announced Goodrich acquisition), we think earnings will continue to be solid in coming quarters and through the course of an expected multi-year commercial aerospace upswing. Nonetheless, management did have some cautious macro comments on its third-quarter conference call, which we reproduce below:
“The developed economies have certainly slowed a bit over the past few months and commercial construction markets remain particularly weak in the U.S. and Europe. But the economies in China, India and Brazil, while slowing slightly are still delivering growth rates well above developed economies.”
As we outlined in the October edition of our Best Ideas Newsletter, investors should expect continued weakness in firms levered to the US housing market (Carrier) and particular strength in aerospace (Hamilton Sundstrand, Pratt & Whitney) and China. All things considered, we’re waiting for United Technologies’ stock-price technicals to improve before adding the firm to our Best Ideas portfolio–as it is already trading below the low end of our fair value estimate range ($75 per share).