A stable and steadily growing U.S. economy should provide a big assist to an industrial company like United Technologies (NYSE:UTX), even if military spending isn't growing much today. The company's elevators and aerospace supply units benefit directly from growth in the economy, but that doesn't seem to be helping the stock with investors.
During the company's most recent earnings report, it said that sales and earnings would both be lower than expected, which was a shock to investors and sent shares sharply lower. The question for investors is whether this company is in the midst of a long-term slowdown or is a steal for investors.
What's going wrong at United Technologies
If you look at United Technologies' organic sales growth for the second quarter of 2015, you can clearly see where the company's problems lie. Europe is slowly chugging along, but there's no growth to speak of, and Asia hasn't been much better. Surprisingly, the Americas are the highest-growth region in the world right now.
The surprising figures are out of Asia, where most people think there's growth galore. But what's really happening on the ground -- based on comments from multinational companies -- is that China's economy is stagnating, and there's concern that it could go into a recession if the government's interventions don't work.
Aerospace is the weakness in UTX
What's a little surprising is that aerospace is the weakest segment for the company, which is troubling since aerospace is about half of the company's business. But this is really a disappointment compared to expectations, not necessarily a red flag for the business in general.
Pratt & Whitney's organic sales were up 2% in the second quarter, driven by 11% growth in military engines. But commercial aftermarket sales were lower than management expected, and they've had to adjust expectations for the future. UTC Aerospace Systems also saw commercial aftermarket sales go "flattish," which was lower than expected. However, all this isn't necessarily terrible for the company long-term. The sales were just lower than the company's expectations. But with aircraft sales going strong worldwide, even the aftermarket business should be solid given a long-enough time frame.
The ups and downs of an industrial manufacturer
More than most companies, an industrial manufacturer like United Technologies is at the whims of the global economy and military spending for earnings and growth. When economies like China's are weak, as we're seeing right now, that can take a bite out of growth.
It's important for investors to keep in mind that there are ups and down in a business like this, but overall the company looks strong -- and 3% organic growth in the current economic environment isn't all that bad. When you consider that shares are now trading for 14 times earnings and yielding a 2.6% dividend, I think the discount the market has given investors is a great buying opportunity, even if guidance is down.
Sometimes the long-term view pays off, and with industry-leading positions in aerospace and construction products, I think United Technologies is better off than investors are giving it credit for right now.