Industrials

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

An existential question for United Technologies Corp.: If your businesses are differentiated enough to justify more than one investor day, shouldn't they perhaps be separate companies? 

In conjunction with its 2017 outlook call on Wednesday, United Technologies CEO Greg Hayes announced that the $89 billion conglomerate is doing away with its traditional springtime discussion of all the company's myriad divisions. Instead, executives from the climate-controls and elevator businesses will lay out their case to investors in March, while the jet engine and airplane-parts units will get their moment in the spotlight in June, in conjunction with a major annual European event for aviation orders.

Puzzle Pieces
United Technologies' revenue is close to evenly split among its four major business units, all of which are large enough to stand on their own
Source: Bloomberg

This makes sense. Air conditioners and airplane wheels don't have a lot to do with each other and not all United Technologies' investors want in-depth details about both. Now, they can pick and choose and maybe save themselves some time (United Technologies March investor day lasted 2 hours and 45 minutes last year). Even the company's analyst base is split between those with an aerospace and defense background and those that cover multi-industrial companies. Also, hosting an aerospace-focused investor day around the Farnborough and Paris Air Shows (the event alternates locations) could encourage more participation from European holders. 

But even taking this step raises questions about structure that go deeper than what should be discussed and when. Do these businesses belong together? Are the two meetings a tacit acknowledgement that maybe they don't? General Electric Co., another big diversified industrial company, often hosts break-out investor days focused on one of its particular business units. It's also faced breakup calls, but it's executed on that to a much larger extent than its Connecticut-based rival. 

Not Enough
United Technologies has climbed about 49 percent over the past five years, compared with a 93 percent gain for a group of its peers
Source: Bloomberg

United Technologies' climate-control, Otis elevator and aerospace businesses have different capital requirements, growth profiles and debt capacities. While the company reiterated its revenue growth goals through 2020 for the aerospace operations, it curbed its expectations for the Otis elevator and climate-solutions divisions. Management is now targeting 3 percent to 5 percent compound annual growth for each of those units, down from 4 percent to 5 percent in March.  The Otis elevator business will also be a drag on profitability as United Technologies tries to reclaim market share in China. The aerospace side is growing quickly, but the high cost of launching a new engine has eroded margins. 

Mosh Pit
United Technologies' aerospace divisions are growing much more quickly than the rest of its business amid the rollout of its new jet engine and healthy aftermarket demand
Source: Bloomberg

Some of these challenges are temporary; others are more worrisome. Lumping all the businesses together -- with both their advantages and setbacks -- has meant that some of the pieces don't receive the value that they should and raises the question of whether United Technologies' size and complexity will get in the way of its earnings and sales growth goals. 

United Technologies' shares declined about 1 percent on Thursday after it forecast a potentially steeper decline in 2017 earnings per share than analysts were expecting. The company is now valued at about 10 times its projected Ebitda for this year. That's not only a discount to peers including GE and Honeywell International Inc., it's lower than the multiple United Technologies commanded three years ago. 

Coming Up Short
United Technologies' valuation lags behind its peers
Source: Bloomberg

Based on competitors' valuations and the company's 2017 profit outlook, the sum of United Technologies' businesses indicates a $101 billion equity value, according to Bloomberg Intelligence analyst Douglas Rothacker. That's nearly 15 percent above its current market value. 

A divestiture of the struggling Sikorsky helicopter unit in 2015 and a significant buyback program haven't been enough to break United Technologies stock out of its under-performance quagmire.

It's time to try something else. 

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