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UTC's Building Businesses Are Poised For Solid Long Term Growth

By: Trefis
Posted: 6/3/2014 1:45:00 PM
Referenced Stocks: UTX

We had recently written on how United Technologies's aerospace business is poised for solid organic growth through the end of this decade . In this article, we highlight how United Technologies 's (UTC) building market related businesses - Otis, Carrier, Kidde and Chubb, among others - are also poised for strong long term growth driven by growing urbanization in the emerging regions of the world.

As large number of people migrate from rural areas to cities in the less developed regions of the world, demand for residential and commercial buildings along side other physical infrastructure will rise from these regions. As UTC's building products enable construction of new buildings we figure the company has a tremendous growth opportunity on its hands. The key building products of UTC include Otis elevators and escalators, Carrier heating, ventilation and air-conditioning (HVAC) systems and Kidde/Chubb fire prevention and security systems. Additionally, as these products are leading players in their respective segments we figure the company will bag a large share of the growth that is anticipated in the global building market. UTC's building products are part of its Building & Industrial Systems segment, which will likely constitute around 45% of its top line in the current year with the remaining coming from the company's aerospace segment, which includes Pratt & Whitney, Sikorsky and an airplane component manufacturing business.

We currently have a stock price estimate of $121 for UTC , around 5% ahead of its current market price.

See our complete analysis of UTC here

Global Building Market Will Grow In The Coming Years Driven By Rising Urbanization

The percentage of population living in cities in the less developed regions of the world (which include all of Africa, Asia excluding Japan, Latin American and the Caribbean) is much below the percentage of population living in cities in the developed regions of the world. Even countries such as China and India that have seen more than two decades of high growth still have a significant portion of their populations living in rural areas. China for instance has around 48% of its population living in rural areas, while India has around 68% of its population living in rural areas. In comparison, developed countries such as the U.S., U.K. and Japan have over 80% of their populations living in cities. Thus, in the coming years, as people in the developing countries move from rural areas to cities, large investments in housing, commercial buildings and other infrastructure will be made. According to the World Urbanization Prospects report from the UN, urban population in the less developed regions of the world will grow from around 2.7 billion currently to nearly 4 billion by 2030. At the same time, many developing countries including China and India are urbanizing with an apartment culture like Western Europe. So, the demand for elevators/escalators and building HVAC, fire prevention and security systems will grow from these countries in the coming years.

Separately, even in the developed countries, where according to the UN report, population is expected to grow modestly from around 960 million currently to 1.06 billion by 2030, demand for building products such as elevators, HVAC systems, fire prevention and security systems will remain driven by replacement and modernization cycles. In all, driven by growing urbanization UTC anticipates the addressable global market for its building businesses to grow from around $150 billion currently to around $210 billion by the end of this decade.

UTC's Building Businesses Are Well Positioned To Gain From The Global Building Market Growth

We figure the building businesses of UTC are well positioned to occupy a large share of the growth anticipated in the global building market. Otis for example, is the largest maker of elevators and escalators in the world and occupies roughly one-fifth of the global elevator/escalator market. Even though it competes with other global elevator/escalator manufacturers such as Schindler, ThyssenKrupp and KONE, we anticipate that Otis will be able to hold its leading position on strength of its advanced portfolio and strong presence in the fast-growing emerging markets of the world.

In recent years, Otis has taken a variety of steps to position itself more suitably for growth. Beginning in 2012, it undertook large scale restructurings like opening and expanding manufacturing plants in Asia-Pacific and Latin America, as well as downsizing facilities in Europe, Japan and North America, to lower its manufacturing costs. We figure these initiatives will enable Otis to price its products more competitively to compete more aggressively with local players in the emerging markets that compete largely on price. Additionally, Otis is increasing its service centers in key growth markets such as China to gain more elevator/escalator maintenance contracts. In all, Otis's advanced product portfolio coupled with its hold in the fast-growing emerging markets will enable it to maintain its leading position in the global elevator and escalator market in the coming years.

UTC's other building businesses are also well positioned to gain from growth in the global building market. In the last few years, the company has launched many new products in its building businesses. These include high efficiency roof top Carrier air-conditioners, acoustic gas leak detection systems, Infinity series of heat pumps and Prism video management security systems.

Separately, as more large scale residential, commercial and industrial projects come into existence, especially in the developing countries, demand will grow for integrated building systems that include fire prevention solutions, security systems, elevators, air conditioning and ventilation systems. It is here that UTC can gain a competitive advantage. Through its wide building product portfolio that includes all these products, it is well positioned to develop integrated building solutions. Very few companies globally possess such a wide building product portfolio, so as demand for integrated building systems grow, UTC will hold a significant advantage over many of its peers in accelerating development of integrated building products. All in all, we figure UTC's building businesses are well positioned to grow in the coming years driven by rising urbanization in the developing regions of the world.

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