United Tech (UTX) Offers No Frills Guidance; Outlook Appears Well Balanced - RBC

RBC reaffirmed its Sector Perform rating and $100 price target on United Technologies Corp. (NYSE: UTX) following the company's issuance of FY16 guidance and update on Thursday.

Analyst Robert Stallard noted that UTX has a balanced outlook for next year. The analyst commented: UTX has a lot of moving parts, but we would consider the company's forecasts for key focus areas as being pretty reasonable, erring on the conservative side in some areas like the aero aftermarket (+0-2% YoY). China continues to be a drag, particularly for Otis OE, whilst there are also pricing and R+D pressures here. Management believes that underinvestment in product has been part of the reason why Otis has lost market share. GTF and defense are a headwinds for P+W margins as well. On the flip side, pension is a +$500m benefit that we had not anticipated, whilst UTX has also conservatively assumed US$/Euro parity (1.10 on the exchange rate would add $0.10 to EPS) and built in the usual $150m ($0.12) of contingency into the EPS guidance. Free cashflow conversion is expected to be 90-100%, though there are working capital pressures, particularly at P&W.

Stallard also offered the following overall view: This was a 'no surprises' show from UTX with regard to the operations, with a positive surprise on the pension benefit and the move to adjusted EPS. The business issues that have arguably held back the stock – China and the aero aftermarket – were a bit of a wash, with a conservative but probably de-risked aftermarket forecast contrasting with what could be an optimistic forecast for China, though that view is admittedly unproven. GTF is a profit headwind for P&W for a number of years, but that's what happens when a new engine hits the market. So overall, we'd view this as a balanced forecast from UTX – but probably not something that is going to materially change investors' view on the stock.

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