United Technologies (UTX, Financial) stock price increased 12% in the third quarter as shareholders expected the Rockwell Collins acquisition to close by quarter end. The stock declined 8% since then largely due to concern about a delay in the closing and uncertainty about economic growth and the impact on the company’s businesses from a potential trade war with China. While some of UTX’s businesses exhibit economic cyclicality, a large portion of its portfolio, particularly the aerospace and Otis Elevator service businesses, are relatively insulated from macro shocks due to strong order books, multiyear backlogs, and the long-term nature of proprietary service contracts. The Rockwell Collins acquisition is still awaiting approval from the Chinese regulator. UTX recently stated that it expects to receive approval and close the transaction in the next several weeks.
UTX has continued studying a business separation, and has committed to announcing a decision as soon as the company closes the Rockwell deal. Based on management’s recent comments, we believe that the company has all but confirmed that it will execute a breakup for which shareholders are highly supportive, particularly in light of GE’s recent woes. While management initially pointed to dis- synergies and one-time separation costs as potential issues, it has recently stated that it believes these costs are manageable and not material in the context of the overall value creation potential of a separation. UTX recently expanded its board and appointed two veteran CEOs who guided their companies through businesses separations.
UTX currently trades at approximately 15 times our estimate of next year’s earnings (pro forma for the Rockwell Collins acquisition), which is significantly below our estimate of the company’s underlying value. We continue to believe that a separation of the company will accelerate shareholder value realization and will serve as a catalyst for investors who will be able to value each of UTX’s businesses separately.
From Bill Ackman (Trades, Portfolio)'s third-quarter 2018 Pershing Square shareholder letter.
