Foolish Forecast: United Tech's Missing Data

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For nearly three years in a row -- 11 quarters in all -- industrial conglomerate United Technologies (NYSE: UTX) has stumped the Street with a clean sweep of "earnings beats." Tomorrow, the company aims to close out its third straight fiscal year with a bang and another beat. Will it succeed?

What analysts say:

• Buy, sell, or waffle? Same as last quarter, 16 of 18 analysts covering United Tech rate it a buy; the other two are still holding.
• Revenue. On average, they expect 10% quarterly revenue growth to $14.1 billion.
• Earnings. Profits are predicted to rise 22% to $1.06 per share.

What management says:
United Tech had some good things to say about 2007 -- in both reports on the year to date and expectations for Q4 -- when it reported its Q3 earnings three months ago. At last report, sales were still growing in the double digits, profits were outpacing sales, and free cash flow was coming in very close to net income. Q4 should continue those trends, and management thinks it will close out this year earning between $4.22 and $4.25 per share on $54 billion in revenue.

The next year may be a different story. United Tech CEO George David warned in October that we should expect a "challenging" year, and Vice President Greg Hayes warned of the effect a weak housing market and generally "slowing U.S. economy" will have on the firm's Carrier HVAC and Otis elevator divisions.

What management does:
In contrast to its single-minded defense-contracting brethren such as General Dynamics (NYSE: GD), Northrop Grumman (NYSE: NOC), and Lockheed Martin (NYSE: LMT), all of which have benefited greatly from GWOT (Global War on Terrorism) spending, the more diversified operation at United Tech is acting as conglomerates are designed to act. Its margins wobble up one quarter, down the next, but generally maintain an even keel. I see no clear trend evident in United Tech's margins at any of the three levels -- gross, operating, or net. On the other hand, these trendless stats still have United Tech achieving operating margins above what any of the above three firms can boast, and superior, too, to the operating margins at Boeing (NYSE: BA), L-3 (NYSE: LLL), and Raytheon (NYSE: RTN).

Margins	6/06	9/06	12/06	3/07	6/07	9/07
Gross	27.5%	27.2%	27.7%	26.9%	27%	27.1%
Operating	12.3%	12.2%	13.2%	12.7%	13%	13.2%
Net	7.4%	7.6%	7.8%	7.7%	7.5%	7.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
This earnings season, I'm running down the "backlog" numbers at all of the major defense contractors, in hopes of finding clues to what their futures might hold. But United Tech is proving a bit tricky. Unlike Northrop Grumman or General Dynamics, for example -- both of which give us detailed data on the state of both their funded and unfunded backlog levels -- or Lockheed, which lumps everything into a single "total backlog" number, United Tech does not attach a number to its backlog at all.

I'm not quite sure why that is. After all, the three aerospace divisions -- Sikorsky, Hamilton Sundstrand, and Pratt & Whitney -- make up a decent chunk of United Tech's total business. Combined, they're nearly as big as the firm's civilian businesses (Otis, Carrier, and UTC Fire & Security). Aerospace peer Textron handles this situation by giving backlog numbers for its two aerospace divisions (Bell and Cessna) separately. But all United Tech tells us is that its Otis division had a "strong backlog entering the year," and that Sikorsky is still "very strong at over $8 billion." Plus, it includes the caveat that "since a substantial portion of the backlog for commercial aerospace customers is scheduled for delivery beyond 2007, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled."

Finally, while $8 billion sounds good, it may not actually be all we're led to think. Rewinding one year to what United Tech was saying in Q3 2006, we found management boasting that: "Sikorsky's military and commercial backlog has reached record levels this year." That "record" adjective was noticeably absent in Q3 2007.

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