Arcángel de Jesús Montoya
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A Few Short-Term Catalysts Will Contribute To United Technologies Corporation's Valuation

United Technologies Corporation's (UTX) Q1 2016 earnings report has a dual character. While UTC's operating income remained at the same level as in Q1 2015, its net profit fell from $1.43 billion to $1.19 billion this year. Net sales increased by 0.3% from $13,320 billion to $13,357 billion, and the main reason for the loss in net income is associated with unfavorable changes in exchange rates.

UTC operates in four business segments (OTIS; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems) with different areas of business, namely in the aerospace, construction and defense industries. Asset diversification allows UTC to make profits in any geopolitical and economic environment. For example, the company was able to demonstrate satisfactory financial results this quarter due to a 7.7% increase in profits at the Pratt & Whitney division. The increased number of capital repairs in the aircraft industry, in particular, in replacements of jet engines, led to a 19% year-over-year sales growth of commercial air spare parts on the aftermarket.

Other companies showed a drop in sales due to currency devaluation against the US dollar, as well as a decrease in global economic activity. Sales of OTIS, UTC Climate, Controls & Security, and UTC Aerospace Systems decreased by 1.1%, 1.2%, and 1.2%, respectively. UTC's operating profit margin decreased by 1%: from 16.4% to 15.4% of sales. It is necessary to take into account the growth of the conglomerate's market capitalization by 1.2%, which can be explained by an increase in capital expenditures (e.g. more CapEx leads to more sales and cash flows in the long-run).

A Few Arguments For United Technologies Corporation's Continued Growth In Valuation

The surge in sales in the aftermarket of air parts is cyclical and temporary, but Pratt & Whitney fully remedies the situation with by introducing new commercial engines, the "geared turbofans", in June 2016. According to management, these engines have better-than-expected fuel efficiency and reliability. This may positively contribute to the engines' sales. Based on the fact that the "geared turbofans" represent a new generation of engines, they can significantly reduce operating noise and the amount of fuel used. The advantages of using these engines give grounds to assume that Pratt & Whitney will soon take a leading position in the air propulsion market.

In February 2016, there was a scandal about the management's decision to close two Indiana plants of the UTC Climate, Controls & Security segment, which were part of the air-conditioning business. These measures will be carried out in connection with the transfer of the segment's factories to Mexico to enhance their global competitiveness, reduce costs, and increase the return on investment. The procedure, according to management, will begin in 2017 and take three years in total.

The recent positive dynamics on the oil market serve as a tailwind for UTC. First and foremost, the rise of the oil market is pushing up prices for other commodities, which contributes to an increase in demand for products and services of industrial companies. Remember that their well-being is closely connected with macro factors like the improvement of global economic activity and the increase in global consumption.

Conclusion

A long-term investment in United Technologies Corporation is reasonable because of the company's competitive advantages over its industrial rivals. The company undoubtedly has demonstrated better financial metrics than most of its direct competitors.

Moreover, a rebound in the growth rate of developed economies will definitely serve as a catalyst for sustainable increase in industrial companies' valuations, and United Technologies Corporation will be one of the first in line to receive investors' dollars.