Conglomerated defense contractor United Technologies (NYSE:UTX) did it again last quarter, extending its streak of broken (in a good way) analyst predictions to six consecutive quarters. Will Tuesday morning's news on Q3 2006 make for the company's lucky number seven?

What analysts say:

  • Buy, sell, or waffle? Twenty analysts follow United Technologies. Their ratings are unchanged since three months ago, with 18 buys and two holds.
  • Revenues. On average, Wall Street is looking for 9% revenue improvement tomorrow, to $11.9 billion.
  • Earnings. And profits growth of twice that rate, at 18.5%, to $0.96 per share.

What management says:
Wall Street remains very bullish on the company, and CEO George David didn't fail to support its optimistic view. Citing his firm's "solid" second-quarter results, David raised estimates for the year -- sales and earnings both. He's now predicting that his business will earn roughly $3.60 for the year on revenue of $47 billion.

Personally, I think those goals are entirely achievable. As Stephen Simpson pointed out last quarter, United Technology is in a cyclical business, and one that's currently on an upswing as national defense spending soars. But "cyclical" isn't always the same thing as "seasonal." This company doesn't ordinarily wallow in profits one quarter, and gasp for cash the next. So when I see that it has booked $22.9 billion in sales so far this year, and that it's expected to add another $11.9 billion to the kitty in next week's news, I come up with a run rate of $46.4 billion for this year -- within spitting distance of $47 billion.

What management does:
United Technologies' profitability remains as steady as they come. Gross margins have bobbled a bit over the last 18 months, but operating and net margins continue to orbit their respective centers of gravity at the 13% and 7% levels, respectively. Combine consistent margins like these with the probable achieving of the above revenue goal, and the firm looks good to me for hitting its profits target by year-end.

Margins %




























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:
So much for GAAP results. What really interests me, though, is how close the business can come to delivering on David's promise that "cash flow after capital expenditures" (Foolishly known as free cash flow) will be "equal to net income for the year." So far this year, free cash flow is falling short of that target. Through the first six months of 2006, United claimed $1.9 billion in net income under GAAP. From a free cash flow perspective, however, cash profits amount to "only" (I think that when using the word only in relation to the word billion, quotation marks should be mandatory) $1.4 billion to date.

Interestingly, David sounded almost abashed when admitting this shortfall back in July, explaining that the aerospace business spent more on building up its inventories than he had anticipated: "We fell short of [our] usual standard of cash flow from operations less capital expenditures in excess of net income, as a result of working capital build." However, he expects to get back on track in the second and third quarters, reducing working capital (i.e., selling down those extra inventories), and ending the year with free cash flow in excess of net income, as promised. We shall see.


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What did we expect out of United Technologies last quarter, and what did it produce? Find out in:

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Fool contributor Rich Smith does not own shares of any company named above.