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What Can We Expect From United Technologies' Q3 Earnings?

United Technologies ( UTX ) is all set to release earnings for Q3 early next week. In the last earnings call, the company revised guidance, now expecting an EPS between $6.45 and $6.60, rising $0.15 over the lower end of its previous guidance. Additionally, the management maintained its guidance for organic growth at a time when competitors like Honeywell have slashed their organic sales outlook. In keeping with the general optimism, the management has also promised to repurchase $2 billion to $3 billion worth of shares this year and an additional $3 billion worth of shares in 2017.

UTC has managed to beat consensus earnings estimates consecutively for the last eight quarters and revenue estimates twice in the same period. We expect this momentum to continue into Q3 as well.

Otis Shines in China, But At A Price:

One of Otis' biggest competitors in China, KONE, stated in its investor presentation that it expected its elevator sales in the country to fall by a notable 10% in 2016, with the fall expected to push into 2017 as well. This comes as no surprise to UTC investors as the company has been gaining market share over KONE in the recent quarters. These are evident in its recent quarterly results. While KONE saw a 5% fall in orders in Q2, United Technologies' elevator bookings rose by 4% in the same period.

However, this rise has led to a 10% decrease in pricing. This shows that the company is willing to take a hit on margins in return for a gain in market share in key markets. At the recently held Morgan Stanley Laguna conference, United Tech stated that while its margins in China were around 20%, it was likely that adverse pricing pressures would persist throughout 2016 and the whole of 2017. The region represents $2.5 billion of UTC's $12.5 billion Otis business, so it's a key market that pressures margins.

Otis' operating margins have fallen steadily from 23% in 2010 to 19.9% in 2015. In 2016, the segment's margins are expected to be around 18.8%.

Pratt & Whitney Sales Suffer:

Earlier in the year, United Technologies expected to deliver about 200 geared turbofan engines in 2016. However, at the recent Morgan Stanley Laguna Conference in September, UTX reduced this number to about 150 deliveries. The company's CEO, Gregory Hayes, attributed the delays to some of the parts, especially the fan blade, in the engines. The engines' aluminium titanium blades are manufactured in different regions around the world and are assembled in one location. The precision and technology in the blades has held UTX back this year. The engine ordinarily takes the company about 30 days to build, but due to the struggle with precision and technology, the engine manufacturer has taken almost 60 days to build.

So far in the year, the company has delivered about 80 engines. It intends to ship an additional 70 in Q4. That said, the ramp up in production is still significant. In 2017, UTC delivered 14 engines. Going forward, it expects to ship around 350-400.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment / ask questions on the comments section

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of UTC

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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