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Are You Investing In UTX? Hold On!
Posted by: Black Iguana (IP Logged)
Date: December 14, 2013 11:54AM

United Technologies (UTX) has had a brilliant 2013. The industrial giant rallied more than 31% in the last few quarters and beat the major indices. However, the idea of the company’s management offering guidance didn’t seem to help the company at all. It rather ended up affecting the company’s share value. The shares of the aerospace giant took a small hit and went down by around 1%. The company’s management still sees some hope and is expecting to earn somewhere around $6.55 to $6.85 in 2014. This indicates that the annual EPS growth would be around 7-11%. Taking a look on the revenue side, there would be sales of around $64 billion as also organic growth of about 3-4%.

On comparing these with what the analysts had predicted we find a very weak revenue growth for the coming year. The analysts had been predicting that the company would earn $6.84 on $66.25 billion sales. Coming back to the revenue growth, it is extremely disappointing and the analysts are expecting it to be twice the organic rate. If we look through the various assumptions made in the UTX’s guidance it becomes clear that the company is being very optimistic. The industrial giant is expecting a growth of about 2.3% in the U.S. whereas they have high expectations in the Latin America. The management expects a significant improvement in the growth rates, i.e., a rise from 2% to 3% in the region. This, if achieved, would be impressive because the current problems in Brazil are surely going to make things challenging for the company. This apart, the company is also bullish on Europe and is forecasting a growth rate of 1.1%- an up from the current 0.1%, fully aware of the fact that some of the major economies of the continent like France are slipping back into recession. With all the focus towards the American and European markets, the management seems to have no concern for the goings of the market in China where the growth will decline steeply to an average 7.4%. The markets in the rest of Asia Pacific are expected to grow by 3.5%- an up from the previous 2.3%, which would be possible only if there is an improvement in the Japanese market.

Another thing to worry for UTX is the fact that the defense budget presented by the U.S. government would be constrained. This would have its ramifications on the growth plans of the company. The government’s plans to withdraw forces from Afghanistan and certain other defense related expenditures might lead to severe fiscal austerity and the company might end up paying more taxes than usual which would further reduce $0.12 out of the already low earnings. This does not seem to be good news for the company.

UTX is set to benefit from a pension that is in a better funded position. This apart, rising interest rates might be another helpful factor. All these factors would have a combined positive effect on the company’s EPS and boost it year over year by $0.30 while on the whole UTX is guiding to a $0.55 EPS increase at the midpoint. Experts are predicting that the company’s EPS growth rate might grow by a meager 4%. The industrial giant has decided to go for a share buyback plan worth $5.4 billion. This means that the actual income growth from operations would be even longer. UTX’s estimation that the free cash flow would be roughly equal to the net income is really good for investors. This would enable the company to return cash to the shareholders. The current return on investment is approximately 2.2% but once the buyback is executed the company would have $3.9 billion in excess cash. Despite the sizable authorization as of the last quarter, the company has only spent $664 million repurchasing shares. With this excess free cash flow the company’s management could increase the speed of the buyback although with around $23 billion in net debt the management’s priority might be paying down debt rather than maximizing the share buyback.

What the management has planned isn’t going to help the company in any way. With really slow growth rate and really low earnings the company is surely going to disappoint in 2014. The aerospace segment though has a huge market exposure but this alone wouldn’t accelerate the growth of revenue and earnings for UTX. The investors must be very cautious if they are planning to put their money in UTX. I, for one, wouldn’t do it. At least for now! Those already holding the shares better begin disposing them off

Stocks Discussed: UTX,
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