United Tech's Troubling Text

I don't know about a "day," but what a difference three months makes! As recently as July, industrial and aerospace conglomerate United Technologies (NYSE: UTX  ) was pointing to "solid markets worldwide in commercial aviation and commercial construction," and predicting "these conditions continuing over the balance of the year and into 2008." Well, scratch that "into 2008" part.

UTC reported earnings Wednesday, and the numbers, as usual, were superb:

  • Sales up 14%, with organic growth contributing nine of those percentage points.
  • Profits per share up 22%.
  • And free cash flow coming in at a healthy $1.14 billion, or 95% of GAAP earnings.

Yet as good as 2007 has been so far, CEO George David warns that 2008 will be "challenging." UTC vice president Greg Hayes says that the twin themes of the coming year will be "housing" and "a slowing U.S. economy" (Funny. Following the news coming out of homebuilders like Ryland (NYSE: RYL  ) and Lennar (NYSE: LEN  ) , and home improvers Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) , I had thought those were the themes this year.) Comments like these helped to shave nearly 4% off UTC's market cap yesterday.

Based on the stock price move, and articles in the mainstream press, you might think that David's and Hayes' predictions had already become fact. Yet the way management has changed its tune in just three months' time should remind Fools that these are no more than educated guesses -- and that sometimes, even CEOs guess wrong. Rather than obsess over management's newfound downbeat tone, I suggest we focus instead on facts, such as the following:

  • Year to date, UTC's biggest business, Carrier, has added 10 basis points to operating margin (in comparison to margins for the first three quarters of 2006). This HVAC business is currently converting 10.3% of its revenues into operating profit.
  • The Otis elevator business, UTC's third largest, did even better. Its operating margin is up 110 b.p. to 19.6%.
  • UTC's second-smallest division showed its second-largest improvement in margin, as Fire and Security added 170 b.p., bringing its margin to 7.5%.
  • UTC's trio of aerospace divisions also did well, with only one showing a decline in profitability (Pratt & Whitney, down 40 b.p. points to 17%), and with another showing the strongest gains in operating margin of all segments (Sikorsky, up 210 b.p. to 7.5%.)

With every business but one earning more profit on its revenue this year than last, and revenue growth strong across the board, UTC now predicts it will earn between $4.22 and $4.25 per share on $54 billion in revenue this year. And with only several weeks left in the year, I'd say that's one prediction you can take to the bank.

Catch up on the latest UTC news with:

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