Why United Technologies Has Struggled to Hold Altitude in 2014

Source: Wikimedia Commons.

One of the dominant investing themes in 2013 was the strength of the commercial aerospace market, with major aircraft manufacturers seeing huge demand for new models that improve fuel efficiency and reduce operating costs. With a wide array of businesses tied to the aerospace industry, United Technologies (RTX 0.82%) reaped the benefits of strong conditions in aerospace last year, and its major acquisition of Goodrich further heightened its exposure to the red-hot sector. Yet so far in 2014, enthusiasm about aircraft manufacturers has cooled off somewhat, and that has United Technologies shares down so far on the year. Let's take a closer look at United Technologies to see what could help the stock turn around its recent losses.

Stats on United Technologies

Source: Yahoo! Finance.

The up and down road for United Technologies
For United Technologies, 2014 has been a tale of two time periods. During the first half of the year, United Technologies stock performed well, building on its past gains. Across its corporate divisions, the conglomerate showed solid results, with aerospace and defense performing reasonably well. Moreover, United Technologies' elevator and building-control businesses reflected encouraging signs of a potential pick-up in commercial construction activity.

But more recently, United Technologies has started to slide. Just since early June, the stock is down by more than 17%, reflecting similar concerns among other companies with exposure to aerospace. In July, the company announced its second-quarter results, sending shares down more than 2% in a single day. Yet a closer look at the company's financials showed better than expected results, including a 3% jump in sales producing an even more impressive rise of 8% in earnings per share. Moreover, even a boost in full-year earnings guidance wasn't enough to persuade shareholders that the company would be able to hold onto its recent growth.

Source: United Technologies.

Part of the challenge for United Technologies is that it expects it will have to spend more on capital projects in order to meet the high demand for aerospace-related products. That in turn could have a negative short-term impact on earnings, even as it represents a long-term investment that should pay off in higher earnings for years to come.

Could Boeing send United Technologies plunging?
The other problem that could hit United Technologies is if supply contracts on which it relies for a substantial part of its revenue get scaled back. Boeing (BA 1.63%) in particular is looking for ways to cut $6 billion out of its budget for its defense, space, and security businesses, and it hopes to get $4 billion or so of that amount from squeezing suppliers like United Technologies to find ways to cut back on their costs. Of course, United Technologies is big enough that even a major cost-reduction effort won't have a huge impact on its earnings, but if Boeing's move signals the beginning of a wider trend across the defense and aerospace industry, then the longer-term effects could eat into United Technologies' anticipated future growth.

On the other hand, optimistic investors hope that United Technologies' swoon is just a short-term blip. The company's Sikorsky division had to change its contract with Canadian Maritime Helicopter, resulting in a one-time hit to earnings and hurting profit margins accordingly. Yet with Otis Elevator doing well and most of the aerospace segment following suit, United Technologies still has the ability to keep riding the cyclical upswing in the industry into the future.

For now, the biggest criticism of United Technologies seems to be that its stock is overpriced. Yet with the company still working at fully integrating its Goodrich acquisition into its existing corporate framework, it's premature to expect the acquired operations to be working at their full potential just yet. Still, investors don't seem to be very patient, and that explains much of why the stock has performed below expectations so far in 2014. Given enough time, though, United Technologies has the benefit of being in a healthy industry at a time when its reputation for reliability should serve it well against its rivals.