United Technologies: Breaking Down the Breakup

Before United Technologies' (RTX 0.68%) aerospace arm merges with Raytheon (RTN), the conglomerate is going to first spin its Otis elevator and Carrier HVAC businesses off as independent companies. In this segment of Industry Focus: Energy, Motley Fool's Nick Sciple and Fool.com contributor Lou Whiteman look at the businesses to be created and discuss how investors might view these soon-to-be independent companies.

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This video was recorded on June 27, 2019.

Nick Sciple: Something we're going to continue to follow. Another thing with United Technologies that has continued to play out, and you have alluded to this, is spinning off both its Otis Elevator division, as well as the Carrier HVAC air conditioning division of the business. This was an announced back in November, that they were going to spin these businesses off. Now, the current timeline we have for when that will officially be done is looking like about the first half of 2020.

When you look at these spin-offs, and we talked a while back about DowDuPont splitting into three companies, is this is a similar profile to what we saw with DowDuPont, creating different businesses with different profiles that maybe might fit different investor bases from how these businesses are being split off?

Lou Whiteman: Yeah. It's important to say, too, that the Raytheon deal will not close until after the split is complete. Very much, this is important to the United Technologies story right now.

They are different businesses. I think for the most part, United Technologies, the aerospace business stands out from the other two. But Otis and Carrier certainly aren't the same. Otis is the name in elevators. Two million elevators installed. Great reoccurring revenue on the services side. They have to maintain all those elevators. Growth has been an issue. More recently, that growth has come from China. In the last few years, we've seem Otis' margins fall, in part because of competition in China. That looks like an income play, a solid services revenue that isn't going to disappear, but you have to question where the growth will be.

Carrier is sort of a hybrid between the two. Again, you have a huge installed base. I think it's 100 million air conditioners installed in the U.S. They're a $20 billion company. Their margins are a little better. There's growth potential there. But, again, it's largely a services business. Also, for Carrier, I don't think they are the top name in the industry in terms of reliability and service. They have taken their hits for quality. They have some work to do with that.

Otis, it's hard to imagine Otis involved with M&A because Otis is too big to be bought, and they're too big, probably, to buy anyone of note. Carrier is in a business that has been consolidating. They'd be a big acquisition for someone. I don't know if that's reasonable. But as you can see them involved in deal-making more than Otis. Both of them probably lean toward income. Carrier with a little more growth potential, but probably a little more risk, because, as I say, it's a competitive market, and in recent years, I don't think they've been the best-regarded brand in the industry.

Sciple: Yeah, you look at Otis, the elevator business, there's a little bit of appeal there. From the servicing side, you get some steady revenue. As you mentioned, it can be an income play, because you have regulations that require you to get these things serviced and licensed over time. That creates some steady income. However, we're not throwing up multi-story buildings at the same rate of growth we're seeing in aerospace. Probably will be a slow grower, but an income opportunity there.