Image source: United Technologies.
What happened
United Technologies Corporation (RTX -0.35%) gave its 2017 outlook presentation and updated investors on development of its strategic objectives. A more detailed analysis of the outlook will follow, but for now let's focus on the headline and segmental numbers.
Management begun by reaffirming its 2016 guidance for EPS of $6.55 to $6.60, sales of $57 billion to $58 billion, and full-year organic sales growth of 2% to 3%, so no surprises there. However, the 2017 guidance was slightly disappointing. The headline numbers:
- Full-year guidance for adjusted EPS in the range of $6.30 to $6.60 straddles the analyst consensus for $6.58.
- Organic sales growth of 2% to 4%.
The EPS outlook is obviously a bit concerning, but then again United Technologies is beginning to build a reputation for underpromising and overdelivering. After all, in December 2015 management forecast $6.30 to $6.60 in EPS for 2016, only to end up with the current outlook for $6.55 to $6.60. Will it do exactly the same in 2017?
Turning to the segmental outlook, there was a slight surprise. As readers may already be aware the company is in transition mode in three of its four segments (Otis, Pratt & Whitney, and UTC aerospace systems) whereby short-term pain is being taken in order to lay the groundwork for long-term earnings and cash flow generation.
In that sense, the operating profit outlook for those segments wasn't a surprise. However, it was the outlook for the remaining segment (climate, controls, and security) that was slightly surprising.
| Segment | Organic Sales Change | Adjusted Operating Profit Change (ex-FX) |
|---|---|---|
| Otis |
Up low single digit |
($100 million to $50 million) |
|
Climate, controls, and security |
Up low single digit |
$150 million to $200 million |
|
Pratt & Whitney |
Up high single digit |
($325 million to $275 million) |
|
UTC aerospace systems |
Up low single digit |
$25 million to $75 million |
Data source: United Technologies Investor Presentation.
It's good to see aerospace systems back to meaningful earnings growth, and the near-term headwinds at Pratt & Whitney and Otis are well known, but CEO Greg Hayes said he had a "question mark" on growth at climate, controls and systems. Indeed, rival heating, ventilation and air-conditioning (HVAC) company Ingersoll-Rand (TT 0.47%) expects mid-single-digit growth in North America going forward, a growth rate not matched by United Technologies' forecast for low-single-digit growth in Americas commercial HVAC.
Does it matter?
Yes and no. Clearly, the EPS outlook is a bit disappointing, as is the sales forecast for climate, controls, and security.
On the other hand, Otis is forecast to grow volume in 2017 (in line with aims to increase long-term service revenue), aerospace systems is starting to overcome headwinds created by (initially at least) lower-margin sales on newer aircraft, and the key to Pratt & Whitney in 2017 is actually the successful ramp in production.
All told, a mixed outlook, but United Technologies remains an attractive value proposition.
