United Technologies Bucks Weak Industrials by Boosting Forecast

  • Markets ‘doing much better’ than global economy, CEO says
  • U.K.’s Brexit vote seen damping orders for Otis elevators

United Technologies Corp. raised the low end of its 2016 profit forecast, defying a trend among industrial companies, as the aerospace and building-system giant reported growth in key businesses.

“The markets that we’re operating in are actually doing much better than the economy is globally,” Chief Executive Officer Gregory Hayes said in an interview Tuesday after reporting earnings that beat analysts’ estimates. “Certainly, commercial aerospace is doing better than the 2 percent global growth that we’re seeing. We’re also seeing strength in commercial construction, especially here in the U.S.”

United Technologies, which also lifted the bottom end of its sales and profit projections in July, is seeking steady growth as it navigates increased production of a new jet engine and an uneven global market for elevators. The Farmington, Connecticut-based company announced a plan last year to help control costs as it looks to expand.

The shares rose 1.2 percent to $100.67 at 10:50 a.m. in New York after gaining as much as 2 percent, the biggest intraday advance since July. United Technologies increased 3.6 percent this year through Monday, while the Standard & Poor’s 500 Index climbed 5.3 percent.

Adjusted earnings this year will be $6.55 to $6.60 a share, compared with a previous range of $6.45 to $6.60 a share, the company said in a statement. The sales projection was held steady at $57 billion to $58 billion.

The forecast boost contrasted with moves by industrial peers such as General Electric Co. and 3M Co., which have trimmed annual projections in recent days. It also signaled a possible rebound for United Technologies, which cut its 2015 outlook several times because of weak demand, a strong dollar and challenges in the oil and gas market.

Nicholas Heymann, an analyst at William Blair & Co., was cautious about the report.

“While 2016 overall has started reasonably well for UTC, we still believe an investment in the company is likely to require extensive patience,” he said in a note. Heymann cited the Pratt & Whitney unit, which needs to prove it can hit delivery targets for the recently introduced geared turbofan jet engine.

Earnings Beat

United Technologies’ third-quarter adjusted earnings rose to $1.76 a share, beating the $1.67 average of analysts’ estimates compiled by Bloomberg. Sales climbed 4.1 percent to $14.4 billion, while analysts had expected $14.3 billion.

Free cash flow was $1.6 billion, a “robust” total despite the costs associated with production-rate increases, Cowen & Co. analyst Cai von Rumohr said in a note.

Revenue increased 8.3 percent at Pratt, where orders have climbed for the geared turbofan engine even as it faced production delays. The company had cut its delivery forecast for the new turbine to 150 this year from the planned 200, disrupting plans by planemakers such as Airbus Group SE and Bombardier Inc.

Pratt is a little over halfway toward its goal of 150 shipments and has “a line of sight” to the full target, Hayes said. The company has reduced the lead time for fan-blade production to 55 days from 100 at the start of the year and has boosted yields significantly, he said.

“Sales upside was driven by Pratt & Whitney, and United Technologies appears to be doing a good job absorbing the negative engine margin associated with” increasing production on the geared turbofan, Deane Dray, an analyst at RBC Capital Markets, said in a note.

Brexit Effect

Revenue at Otis elevators declined slightly as construction slowed in China. While orders rose in the U.S., demand fell sharply in the U.K. following the vote to leave the European Union.

“The U.K. was hot through the first half of the year,” Hayes said. “We saw orders down about 17 percent in the U.K. in the third quarter in the Otis business, and I think that is directly attributable to people pulling back on projects in the U.K.”

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