Industrials

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

Boring looks pretty good on United Technologies Corp.

The $95 billion maker of jet engines, air conditioners and elevators reported first-quarter earnings on Wednesday that comfortably exceeded analysts' estimates. It largely got there the old-fashioned way, with strong organic revenue growth of 3 percent and a decent enough profit performance, as opposed to relying on the below-the-line assistance that investors have shown little patience for this industrial earnings season.

In Line
There were a few give and takes, but United Technologies generally performed as expected across its business lines
Source: Estimates are from Cowen & Co. analyst Cai von Rumohr

Boeing Co. was the latest to get blowback for relying on tax gains to help it beat analysts' first quarter estimates on Wednesday, with its shares down about 1.5 percent mid-morning in New York. Quality of earnings is out-prioritizing quantity these days, and on that front, United Technologies delivered. Interest expense and share count was lower than anticipated, but its tax rate was actually a bit higher in the period than what Stifel Financial Corp. analyst Robert McCarthy had estimated. I believe the scientific term for this kind of quarter is: "fine."

This Will Do
United Technologies' solid first-quarter earnings helped drive the stock up further
Source: Bloomberg

Sure, one could be nitpicky about some of United Technologies' numbers, but executives did a good job of acknowledging the problems, explaining them and laying out clear reasons for why they wouldn't repeat. A weak operating profit performance in its climate, controls and security business was one of the bigger disappointments. United Technologies blamed this on an unfavorable contract adjustment, acquisitions that it's still integrating and a swing to less-profitable products. The unfavorable mix should work itself out over the course of the year as higher-margin service activity picks up and the division continues its cost-cutting efforts.  

Under Control
CEO Greg Hayes kicked off his tenure with several guidance knockdowns, but United Technologies was able to surpass its original EPS outlook last year. This latest batch of results should help to further shore up Hayes' credibility.
Source: Bloomberg

The same goes for United Technologies' geared turbofan jet engine, whose rollout has been haunted by production delays and technical issues. The company fell short of its delivery target last year and said in January it was addressing durability issues in harsh climates. The bad headlines have continued: Earlier this month, Spirit Airlines took three planes out of service after discovering issues with their GTF engines. The challenges clearly aren't behind it yet, but United Technologies appears to have a handle on them.

The company delivered 70 of the engines in the period -- an uptick from the 62 it handed over in the fourth quarter -- leaving it on track for its targeted 350 to 400 deliveries for the year. It has a fix for a problematic carbon seal and plans to complete most of the necessary upgrades by the middle of May. Most importantly for investors, the cost of retrofitting the GTF to fix the glitches is already factored into the outlook for the Pratt & Whitney division that handles its production. And in a positive sign, the operating margin of 10.5 percent at the Pratt & Whitney division exceeded the average of four analysts' estimates compiled by Bloomberg Gadfly.

Crossing Wires
UTX is fast approaching analysts' price target for the year
Source: Bloomberg

Generally speaking, things seem to be moving along OK at United Technologies. That's a victory, but it's far from enough to drive a massive outperf0rmance -- particularly on top of its 2.9 percent gain in the week leading up to earnings amid positive reports from fellow aerospace suppliers including Rockwell Collins Inc. and Honeywell International Inc. The stock has gone about as far as it's going to go this year, at least by analysts' count. A few more quarters like this though -- and no more problems with the GTF -- and United Technologies may be consistently boring enough to make investors excited.

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

  1. The company is prepared to spend as much as $50 million on additional endurance testing just to make sure no other surprises arise. It hasn't found anything yet.

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