Report
Joshua Aguilar
EUR 850.00 For Business Accounts Only

Morningstar | UTC Posts Solid Second-Quarter Results; Spins on Track

We believe United Technologies’ decision to spin off both Otis and Carrier will unlock considerable shareholder value, based on our sum of the parts valuation analysis. Ultimately, we believe the board rightly realized that UTC had underinvested in these two segments, thereby missing out on certain growth opportunities. Unfortunately, we think prior management sacrificed long-term shareholder value and relied on these higher-return and comparably shorter-cycle businesses to drive near-term earnings growth. Carrier is short-cycle, and Otis, while long-cycled, has a shorter investment horizon relative to UTC’s multi-decade aerospace platform and is UTC’s highest-return on capital business. Specifically, Otis lost significant share to Kone in China, which has some of the best secular growth trends given increasing urbanization and growth in the middle class for the sake of protecting margins. Losing out on growing the Chinese installed base ultimately means losing out on decades’ worth of enviable higher-margin aftermarket service revenue. The proof of broader disappointment is in its results: UTC’s share price returns rose a paltry 15% over the past five years in aggregate, compared with a price return of just over 50% for the S&P 500. UTC is not unique in this regard. Many conglomerates stubbornly refuse to recognize that many of businesses no longer deserve to belong together. While conglomerates have certain tax advantages in terms of allocating capital between businesses, shareholders ultimately cede this capital allocation decision in the hopes that its management teams can produce greater-than-market returns. Unfortunately, these management teams are often saddled into only making so-called strategic acquisitions (buying the competition or distribution) at inflated multiples. We believe the combination of Rockwell Collins and UTC leaves a “remainco” with an unequaled portfolio in terms of breadth of products and services, as well as scale in the aerospace industry. Ultimately, we believe commercial aerospace will continue to be a boon for UTC given that we expect revenue passenger kilometers will grow between 4% and 5% annually over the next two decades.
Underlying
Raytheon Technologies Corporation

United Technologies provides technology products and services to the building systems and aerospace industries. The company has four segments: Otis, which designs, manufactures, sells and installs passenger and freight elevators; Carrier, which provides heating, ventilating, air conditioning refrigeration, fire, security and building automation products; Pratt & Whitney, which supplies aircraft engines for the commercial, military, business jet and general aviation market; and Collins Aerospace Systems, which provides aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Joshua Aguilar

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