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United Technologies (UTX) Rides on Inorganic Strategies

Leading provider of technology services, United Technologies Corporation UTX serves various end-markets such as aerospace, defense and commercial construction, that move according to their own cycles.

Headquartered in Farmington, CT, the company’s business mix and diversification allows the it to remain profitable even during tough economic times, delivering consistent earnings and dividend growth. The company has an experienced management team and is likely to capitalize on the continued global economic recovery and deliver sustainable earnings growth in future. In order to fuel its growth momentum, the company further remains focused on four key priorities: flawless execution, innovation for growth, structural cost reduction and disciplined capital allocation. United Technologies is also seeking potential acquisition opportunities to achieve aggressive revenue targets and augment its market position.

The company intends to expand its foothold in the aerospace industry with the acquisition of Rockwell Collins, Inc. COL. Per undisclosed sources, the company has submitted an offer to acquire the aircraft component manufacturer. Rockwell Collins has a market capitalization of $19.3 billion. This acquisition will enable United Technologies bulk up its aerospace group, separating it from its other industrial units. This deal has not yet been confirmed, as both the companies are currently in talks. 

On Mar 6, 2017, UTC Climate, Controls & Security (“CCS”) completed its planned acquisition of EcoEnergy, Wipro Limited’s WIT energy services business division based in Bengaluru, India. EcoEnergy is a leading energy management solutions company. The completion of the CCS acquisition along with the Otis buyout closed last year, contributed to the company’s growth in the second quarter. The company expects to invest around $1−$2 billion in mergers and acquisitions this year. We expect these acquisitions to bode well for the company. These strategic acquisitions are expected to help the company stay ahead of its peers such as Federal Signal Corporation FSS.

The company reported better-than-expected results in second-quarter 2017. Quarterly adjusted earnings from continuing operations came in at $1.85 per share, beating the Zacks Consensus Estimate of $1.77. The bottom line also came in 1.6% higher than the year-ago tally. The upside was driven by solid organic sales and acquisition-based growth. Net sales in the reported quarter came in at $15.28 billion, outpacing the Zacks Consensus Estimate of $15.18 billion. In addition, the top line came in 2.7% higher than the prior-year figure.  

United Technologies is also poised to grow on the back of innovation investments, robust backlog and strategic cost-reduction efforts. Backed by these positives, the company raised the lower end of its full-year 2017 earnings guidance. Adjusted earnings are currently anticipated to lie within the $6.45–$6.60 per share range versus the previously estimated range of $6.30−$6.60. 

However, the financial performance of the company depends on the conditions of the construction and aerospace industries. It is also heavily dependent on the U.S. government’s budgetary allocation for defense. A reduction in capital spending for the commercial aviation or defense industries is likely to have a significant effect on demand for its products, which could in turn have an adverse impact on its financial performance. United Technologies designs, manufactures and services products that incorporate advanced technologies. The introduction of new products and technologies involves risks and high R&D expenses, and the degree or timing of benefits may not be correctly anticipated. At present, United Technologies seems to be facing challenges on most fronts and it would be prudent for investors to remain on the sidelines for some time.

With over 8,000 employees, United Technologies has a considerable presence in the U.K. Consequently, the company is susceptible to high operating risks following the Brexit referendum. Fluctuations in foreign currency exchange rates also affect the company’s net investment in foreign subsidiaries and may cause instability in cash flows related to foreign denominated transactions. These undermine its long-term growth to some extent.

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