Please ensure Javascript is enabled for purposes of website accessibility

United Technologies and Honeywell International Update Investors

By Lee Samaha - May 27, 2016 at 10:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A look at the companies' most recent investor presentations, and how they are both shaping up for the rest of 2016.

United Technologies (RTX 0.95%) and Honeywell International (HON 0.75%) are having a pretty good year so far. Both stocks have outperformed the S&P 500 as initial fears for an industrial recession have abated throughout the year. United Technologies is the cheaper stock, but both look like a good value based on their forward estimates.

Let's take a look at their presentations at the recent Electrical Products Group (EPG) conference, and what management said about their earnings prospects in 2016.

UTX Chart

UTX data by YCharts.

Honeywell full-year guidance affirmed

Despite a moderation in global growth forecasts in 2016, both companies maintained full-year guidance at the conference. Honeywell COO Darius Adamczyk revealed that April was running in line with expectations. Moreover, his commentary on each of Honeywell's three segments gave cause for optimism.

Going back to Honeywell's first quarter, the company generated stronger-than-expected overall sales that helped to offset a weaker margin, resulting in EPS at the top of management's guidance range. However, outcomes weren't consistent across each segment.

In Aerospace, Honeywell really is firing on all cylinders, with first-quarter organic sales growth of 3% coming in ahead of expectations for 1% to 2%. That performance seems to be carrying through into the second quarter, with Adamczyk confirming good aftermarket sales due to ongoing growth in flight hours.

Image source: Honeywell.

Automation and Control Solutions

In ACS, Honeywell saw an interesting dynamic in the first quarter with strong growth (11% core organic) in its relatively lower-margin building solutions and distribution sales (BSD) while higher-margin Energy, Safety, and Security (ESS) sales growth was flat on an organic basis -- the result was a reduction in margin. When discussing current ACS sales trends, Adamczyk confirmed they are "very good," suggesting the ACS segment can continue to offset any margin compression with stronger sales growth.

Performance Materials and Technologies

The PMT segment is arguably the most problematic. Core organic sales were down 8% in the first quarter, with UOP (formerly known as Universal Oil Products) petrochemical catalyst sales down a whopping 38%. On the earnings call, CFO Tom Szlosek argued that catalyst business growth rates would improve in the second half. In addition, CEO David Cote claimed UOP sales were lumpy because of the lag between orders and sales, but he claimed, "We have a pretty good sense for the year and what happens in the second half versus this first half when it comes to catalysts."

Clearly, order patterns matter, so when Adamczyk updated investors at EPG by saying PMT bookings were good, it's fairly reasonable to assume management's plans for PMT in 2016 are still on track.

United Technologies on track, but questions remain

The company is less highly rated than its one-time suitor, but the market has good reason. While Honeywell's ability to execute and its strategic direction are rarely questioned, United Technologies' management often fields questions from analysts on both matters -- and CEO Greg Hayes' presentation at EPG was no different. To complicate things further, the company is going through a transitional year in three of its four segments.

Management is using pricing to try to gain market share with Otis in China and defend its high-margin elevator servicing business from local competition. Consequently, Otis unit sales rose 2% in China in the first quarter, while China sales declined 3% -- a classic trade-off of pricing for new equipment sales. At EPG, Hayes argued that Otis is "never going to be the low price leader" in China and is therefore unlikely to drive down pricing in the market overall. Moreover, he declared a willingness to make acquisitions to gain market share.

On a more disappointing note, he outlined that weather patterns in the U.S. hadn't helped residential Heating, Ventilation and Air Conditioning (HVAC) demand in the U.S., and pricing pressure could occur later in the year -- not great news for the Climate, Controls and Security segment.

United Technologies is trying to increase Otis unit sales in China. Image source: United Technologies.

Pratt & Whitney and Aerospace Systems

Pratt & Whitney has to overcome negative engine margin as the initial cost per unit of production on its new geared turbofan engine. However, Hayes argued that the overhaul cycle and aftermarket revenue from the V2500 engine (which powers the Airbus A320 family and is manufactured by a partnership including Pratt & Whitney) should support growth prospects. Meanwhile, putting the geared turbofan engine on Boeing Company platforms remains a possibility -- particularly if Boeing responds to competition from the A321.

The aerospace systems segment also faces headwinds in 2016 -- principally from, initially at least, newer, lower-margin products replacing legacy systems -- but Hayes affirmed the ongoing strength of the commercial aftermarket.

Looking ahead

Both companies affirmed full-year guidance at EPG, although Honeywell appears to have better sales and earnings traction. Honeywell's Aerospace and ACS segments continue to perform well, while PMT looks set for a better second half -- all good news.

United Technologies has near-term headwinds to overcome, as well as a softer outlook for HVAC sales, and some longer-term considerations with Otis (China) and Pratt & Whitney (geared turbofan production), but so far, the company still appears to be on track in 2016.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
$97.02 (0.95%) $0.91
Honeywell International Inc. Stock Quote
Honeywell International Inc.
$175.11 (0.75%) $1.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.