United Technologies Corporation (NYSE:UTX)
UTX’s second quarter earnings showed strong organic revenue growth of 6%, led by growth in the aerospace businesses of 10%. Organic revenue growth has been above 5% for the last four consecutive quarters. The company raised its guidance for 2018 EPS for the second time this year. UTX now expects full year organic revenue growth of between 5% and 6% and EPS growth (before the impact of the Rockwell Collins acquisition) of 7% to 9%.
Despite significant profit growth in its aerospace businesses, UTX’s operating profit was roughly flat compared with the prior year due to a decline in earnings from the commercial businesses (CC&S and Otis). In the aerospace businesses, UTAS organic revenues increased 8% and operating profits grew 17%. Pratt & Whitney organic revenues increased 12% and operating profit grew 8% due to the initial losses associated with ramp-up of the GTF engine program.
In its commercial businesses, CC&S organic revenues grew 4% but operating profit was flat as input costs and new product investments increased. Otis organic revenues grew 3% but operating profit declined 11%, partly due to continued price and mix pressure in China and one-time costs. Offsetting these weaker results were strong growth in equipment orders, a leading indicator of future revenue, which grew 8% for CC&S and 10% for Otis.
We believe the divergent performance of the aerospace and commercial businesses further reinforces the logic of a business separation of UTX’s subsidiaries, as the strength in the aerospace business is not being appropriately reflected in UTX’s stock price, which trades at only 16 to 17 times our estimate of this year’s earnings (pro-forma for the Rockwell Collins acquisition). UTX’s CEO, Greg Hayes, stated on the earnings call that “all options are on the table” to maximize long-term shareholder value including a three-way split of the company and/or potential business divestitures. Management reiterated that the acquisition of Rockwell Collins is expected to close in the third quarter and that the company will announce the results of its strategic review in the fourth quarter.
From Bill Ackman (Trades, Portfolio)'s second quarter 2018 Pershing Square shareholder letter.
