Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

To stand out in this generally gloomy industrial earnings season, all United Technologies had to do was stay the course and not give investors any more bad news. It did one better and then some.

Well, Thank You
Few industrial companies have seen their shares rise after reporting their results this earnings season.
Source: Bloomberg
Honeywell and Dover data reflects the stocks' performance on the first trading day after their earnings pre-announcements. Data for 3M, Caterpillar and United Technologies reflects the biggest price swing on Tuesday as of noon.

The $85 billion conglomerate not only reported third-quarter results that surpassed analysts' estimates, it also lifted its full-year outlook for profit and organic sales. That's after rivals Honeywell and General Electric slashed their growth forecasts.

United Technologies now says adjusted earnings per share in 2016 will be in the range of $6.55 to  $6.60, up about 5 cents at the midpoint from the boosted guidance the company gave in July. Organic sales will grow by at least 2 percent. That stood out relative to GE and Honeywell, but also to the likes of 3M and Caterpillar, which added their names Tuesday to the list of industrial companies with darkened views on 2016. United Technologies shares climbed as much as 2.4 percent Tuesday for one of the biggest gains among industrial stocks within the S&P 500.

Managing Expectations
United Technologies has missed analysts' earnings estimates only once in the last decade. Sometimes that was because it had already lowered guidance, but the track record is still pretty impressive.
Source: Bloomberg

One of the big growth drivers that helped set United Technologies apart this quarter was its Pratt & Whitney division, which after more than a decade finally put its new geared turbofan jet engine into service. That business caused United Technologies headaches earlier this year when production delays forced the company to cut its 2016 delivery goals, but in the third quarter revenue at Pratt & Whitney soared 13 percent on an organic basis as its order book swelled to 8,400 engines.  

The engine sales also probably helped lift results at United Technologies' aerospace-systems division, which makes nacelles -- the casings that envelop the jet engines. Sales at that unit (known as UTAS) grew 6 percent on an organic basis.

That's in contrast to Honeywell, which reported a 6 percent decline in core revenue for its aerospace segment, which includes both parts and engines. Honeywell was hit harder by weak demand for business jets and also grappled with the ongoing downturn in sales of commercial helicopters -- something United Technologies doesn't have to worry about as much anymore after selling its Sikorsky helicopter unit last year.

U-Turn
United Technologies had dropped about 2.5 percent in the wake of Honeywell's reduced guidance. It made up some of those losses on Tuesday after its results were better than expected.
Source: Bloomberg

Things aren't all upbeat. Profitability challenges persist at United Technologies' Otis elevator unit as the company tries to reclaim share in a weakened China market. And it remains to be seen whether this year's production delays will be the last for Pratt & Whitney's expensive new jet engine. Also, as production on the new jet engine ramps up, so too will the costs involved. CFO Akhil Johri said it's difficult to see how the company increases its earnings next year.

In other words, it's going to be a while before United Technologies' investments and rejiggering pay off. Its shares is still trading at a significant discount to the $103 billion value that Bloomberg Intelligence analysts assign to the sum of its parts. But investors should now be able to have a bit more confidence that United Technologies' management team will steer the company in the right direction. Making a second profit-guidance increase in as many quarters stands in stark contrast to its multiple forecast cuts last year and goes a long way toward rebuilding CEO Greg Hayes's credibility.

Sticking it to General Electric and Honeywell doesn't hurt from a morale perspective, either.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net