United Technologies (UTX) held its analyst meeting yesterday and the new CEO reined in earnings estimates for 2015 -- which were admittedly stale. Part of this is the new CEO resetting expectations and part is conservatism.
Excluding currency and pension, earnings guidance still implies 9% y/y growth (3-5% organic), but we would expect the company to continue to buy back its stock. This could get it to double-digit gains, without heroic assumptions. In fact, the company was disappointing in the 2014 buyback/cash allocation, and so we'd expect to see more in 2015 (FCF is likely to be 90-95% of net income from 80% in 2014, and headed to 100% by 2016).
Shares have rallied 13% from the lows, and so today's 2% decline on the lowered numbers is understandable. Under the new management team (the company also announced a new CFO yesterday -- who was at United Tech for 26 years) the company has a lot of options in our opinion for value creation. For these reasons, we stay involved in the stock -- and we're buyer should the stock weaken to the mid $100s.
The various options are: selling parts of the Sikorsky portfolio that don't fit or are underperforming (the CEO did say that at the right price "anything" is for sale); partnering Pratt and Whitney and Rolls Royce commercial engine businesses; expanding the installed base (i.e. acquisition) of Otis (to increase recurring revenue); expanding the climate, controls & security division via heavier internal investment and/or acquisitions; stripping down aerospace through cost cuts and margin focus; and, most interesting, doing a big deal in its BIS (building/industrial) division -- north of $5 billion.
This last option is most interesting and solidifies our belief that non-residential/residential construction is on the rise (this segment is building automation, elevators and escalators, fire/safety, heating, cooling, ventilation). It's our sense that BIS will grow in size as a percent of total revenues over the coming years. It currently is 46% of total revenues.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long UTX.