Industrial conglomerate United Technologies (UTX – Free United Technologies Stock Report), a company that makes everything from escalators and elevators to military helicopters, has reported first-quarter results. Most of the early headlines read that profits fell on a year-over-year basis, but that would be with the inclusion of restructuring costs, which we have taken out, to better reflect operating performance. In fact, earnings were up a few pennies from last year and revenues met our target. Once the investment community took notice of these facts, the shares inched up a bit in early trading.
With regard to the bottom line, recurring earnings per share came in at $1.41. Many pundits are picking up the number $1.32, but that is not the best illustration of the company's health. Those who follow UTX closely will know that it is still overhauling its defense and aerospace business after the sizable purchase of Goodrich a couple of years ago. All told, there were $0.09 in restructuring costs that we are excluding from our presentation. The $1.41 figure is up from the $1.39 posted in the year-earlier period, and roughly a dime better than both our and Wall Street's consensus expectations.
From a top-line perspective, revenues were $14.75 billion spot, on with our call. On the conference call, management cited China as one area that provided a hefty sales increase year over year. Infrastructure spending in that country is on the rise, and United Tech. has been able to reap the benefits of this. More specifically, organic growth came in at 5%, which after backing out a loss of 2% due to divestitures and an adverse foreign exchange impact of 1%, left 2% growth from 2013's number. All five of the company's operating segments contributed to the rise in growth from continuing operations, and leadership commented that each of its endmarkets was improving.
Individually, new equipment orders at Otis, the world's largest manufacturer of escalators and elevators, rose 9% overall and 27% in China. Aerospace operations also got in on the fun, as Pratt & Whitney, an aerospace manufacturer, saw large commercial engine spare orders increase 11%. As a result of the Goodrich deal, aerospace is now a much larger piece of the UTX puzzle and this move appears to have taken place at a most opportune time; the commercial aviation market has been in an upswing ever since.
One area that is constantly in the news is defense spending. Many companies are struggling this year because of a dip in government expenditures on this front domestically. True, UTX's stateside sales will probably drop by roughly 5% in 2013, but, overall, the picture will remain unchanged, as international sales have been ticking upward and compensating for any downturn at home.
Looking ahead over the balance of 2014, we reiterate that United's management is known for setting the bar low and consistently hurdling it. With that in mind, it should be of little concern that our figures for this year outdistance the provided guidance range on revenues and are at the top of earnings forecasts. Specifically, management’s call is for revenues of $64 billion; ours is $65 billion. All the chatter on the conference call was positive and there is no particular pocket of weakness at this time. Yes, our call could prove to be aggressive, though we are comfortable with such a figure, using history as a guide. On the earnings front, the bottom of the guidance range was lifted by a dime, to $6.65. Still, we are maintaining our estimate at the top of this domain, which is $6.85. Too, potential upside exists to this figure, if additional savings can be wrung out of the Goodrich integration.
From an investment perspective, we think UTX shares are a home run. The company boasts excellent finances and has a rapidly growing dividend that should bring those seeking total return to its doorstep. Year to date, the stock has posted a return of more than 5%, easily outpacing the market overall. United Technologies stock does not receive as much press as more high-profile industrial conglomerates, but it packs a similar punch as far as steady returns go. Far be it to say that any equity in the Dow flies under the radar, but UTX certainly does not get the same kind of coverage as GE, for example. Regardless, it can be a cornerstone holding in many portfolios.
About The Company: United Technologies operates in five business segments: Pratt & Whitney (revenues of $14.0 billion in 2012) makes and services aircraft engines; Otis ($12.1 billion) manufactures and services elevators; UTC Climate ($17.1 billion) makes heating, ventilating, and air-conditioning equipment; Sikorsky ($6.9 billion) makes helicopters; UTC Aerospace ($8.3 billion) produces aerospace and industrial products.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.