UTX - United Technologies

[Phaceliacapital]

Anyone taker at this price? Haven't done a proper due diligence but wondering if there is anyone here with a clear bull/bear view?

 

• Almost oligopolistic markets

 

Elevators (good recurring revenue in terms of maintenance & servicing) through Otis

Climate control and security applications

Jet engines through pratt & whitney for narrowbody planes (with highly anticipated GTF engine)

Other aerospace applications (flight tracking, landing systems, wheels & brakes, …) that have seen increasing USD content on the new plane platforms.

 

• Sold sikorsky for 9 bn and authorized buyback for 8 bn (current market cap 88 bn)

• Management sees +/- 5% organic growth.

• Trades at 15.2x FY15 earnings, and 6% FCF yield (without growth)

• Stock buybacks on average 1.4% per year

• Grown EBITDA per share at 7.4% and FCF per share at 5.7%

• Dividend at 2.6%

 

[rb]

That's a good catch. I've been tracking it for a while too. Prices were kinda high for me but it's getting really interesting at these prices especially after today.

 

While I've looked at it, I haven't yet done a deep dive and full model, but I generally like all the industries they are in. A couple of observations though:

 

1. Pratt & Whitney is not as good a business as GE or Rolls Royce. However that won't prevent them for being quite profitable in the future.

2. Otis has benefitted hugely from the building boom in China, so the future won't be as bright as the past. That being said I love the industry. There are not many industries better than elevators.

 

I will definitely have to go deeper into this soon. With this market action things are getting really busy  ;D

[no_free_lunch]

Room for improvement.  Not sold on this one yet but certainly interesting at these levels.

 

Since taking on the CEO job in November after the abrupt retirement of his predecessor, Mr. Hayes has been tasked with boosting the share price and improving operations of the company, which also makes Pratt & Whitney jet engines. He has shaken up management, brought back former executives and recently agreed to sell United Technologies’ smallest unit, the Sikorsky helicopter business.

..

Two years ago, United Technologies merged Otis and Carrier and several other brands under one structure, but the benefits of the combined unit have come up short. It enabled cost-cutting, but cross-selling using Otis’s sales contacts to interest builders in a Carrier cooling system, for instance, has been more modest than forecast, and the performance of the individual brands has gotten lost.

 

Otis, in particular, has suffered in the new structure. Ordinarily a cash-generating engine with an installed base of 1.9 million elevators that it maintains around the world, the elevator unit in July had to pare back its profit forecast for the year by $300 million to $350 million, weighed down by slowing growth in China and a stagnant European elevator market. Market share in China fell to 15% currently from an estimated 25% several years ago.

 

The drop in Otis’s market share in China “is shocking,” Nicholas Heymann, of William Blair & Co., wrote in a note to investors, calling for a “change in culture” rather than further cost-cutting. “Often this type of extended gradual erosion of a company’s business franchises takes more than cost reduction to fix,” Mr. Heymann wrote.

 

United Technologies’ Mr. Hayes said Otis has focused too heavily on keeping profit margins high at the expense of boosting its share of the elevator market. The company must be more competitive in claiming new market share to win the lucrative contracts to service installed elevators in future years. To do so, it may have to compromise on price for new sales to lock up long-term service contracts, Mr. Hayes said.

..

“People say we need to take a timeout from M&A because of last quarter,” Mr. Hayes said. “I disagree. We’re not going to turn off the spigot.”

 

http://www.wsj.com/articles/united-technologies-ceo-plans-to-shake-up-building-unit-1438866755

 

 

[rb]

I was just saying like you that it's getting interesting at these levels. I'm still not comfortable enough to pull the trigger. I'd like to see it cheaper.

 

I don't think that the management team are first rate capital allocators. When they talk about doing acquisitions to replace the lost revenue from Sikorsky but don't mention anything about value I get really nervous.

 

The company is into some very good industries though.

[no_free_lunch]

Yeah, I tend to agree with you.  P/FCF looks to be 16x based on last years numbers, it's cheap but not crazy cheap.  I like the ROE, someone on seeking alpha has them around 20% for the past 5 years but it's not enough given how weak sales are, global economy risks, management.  I think I will need to see a management change or a lower price.  Maybe if you hedged it against china?

[walkie518]

UTX has seen some traction in sales as well as improvement in quality of earnings

 

given these factors, for a substantive yet growing business, it seems cheap relative to the market (though perhaps not on an absolute basis?) 

 

thoughts?

[stockspinoffinvesting]

I'm usually interested in smaller/juicier opportunities, but I think it looks attractive versus other big cap stocks, especially in light of the breakup.

 

My sum-of-the-parts valuation:

 

Business

Aerospace (remainco): $5.175BN in TTM EBIT * 16.1x (HON and TDG multiple) = ~$83BN

Carrier: $3.684BN in TTM EBIT * 18.1x (ALLE, LII, and IR multiple) = ~$67BN

Otis: $1.890BN in TTM EBIT * 17.2x (KONE Oyj multiple) = ~$32.4BN

 

Costs:

Unallocated recurring corporate costs (include $350MM related to spin dis-synergies) add up to $1.8BN.

I capitalized those costs at 17.0x (my weighted average multiple) to get $31.4BN.

UTX will also spend ~$2.5BN (midpoint of guidance) on one time costs to separate 1200 different legal entities.

 

Add $7.6BN of cash (PF of Rockwell Collins acquisition).

Subtract $39.9BN of debt (PF for Rockwell Collins acquisition).

Subtract $2.4BN of pension liabilities.

 

This all yields: $114BN of equity value of $132 per share (current share price of $114).

 

There is also significant potential upside.

 

1) $500MM of Rockwell Collins synergies. Capitalized at 16.1x = $8,050MM of potential value

2) UTX is currently losing ~$1BN per year on its geared turbofan engines. However, as sales volumes ramp up, those losses will turn to profits. If you eliminate $1BN of losses and capitalize at 16.1x = $16.1BN of potential value

3) As Aerospace Remainco will be 50% larger than its closes competitor (GE), it could garner a valuation premium to reflect its better economies of scale, etc. A 10% premium would add $8.3BN of potential value.

 

Including all the upside drivers, you get $146.6BN or $170 per share (~49% upside). Of course this won't happen over night (the spin process could take up to 24 months).

 

Anyone know the bear case? From my perspective its Otis and Carrier businesses are pretty cyclically exposed should we enter a recession. However, aerospace is very well positioned from a secular perspective (growing middle class globally is travelling more and more). https://www.statista.com/statistics/564717/airline-industry-passenger-traffic-globally/

 

 

[walkie518]

I'm usually interested in smaller/juicier opportunities, but I think it looks attractive versus other big cap stocks, especially in light of the breakup.

 

My sum-of-the-parts valuation:

 

Business

Aerospace (remainco): $5.175BN in TTM EBIT * 16.1x (HON and TDG multiple) = ~$83BN

Carrier: $3.684BN in TTM EBIT * 18.1x (ALLE, LII, and IR multiple) = ~$67BN

Otis: $1.890BN in TTM EBIT * 17.2x (KONE Oyj multiple) = ~$32.4BN

 

Costs:

Unallocated recurring corporate costs (include $350MM related to spin dis-synergies) add up to $1.8BN.

I capitalized those costs at 17.0x (my weighted average multiple) to get $31.4BN.

UTX will also spend ~$2.5BN (midpoint of guidance) on one time costs to separate 1200 different legal entities.

 

Add $7.6BN of cash (PF of Rockwell Collins acquisition).

Subtract $39.9BN of debt (PF for Rockwell Collins acquisition).

Subtract $2.4BN of pension liabilities.

 

This all yields: $114BN of equity value of $132 per share (current share price of $114).

 

There is also significant potential upside.

 

1) $500MM of Rockwell Collins synergies. Capitalized at 16.1x = $8,050MM of potential value

2) UTX is currently losing ~$1BN per year on its geared turbofan engines. However, as sales volumes ramp up, those losses will turn to profits. If you eliminate $1BN of losses and capitalize at 16.1x = $16.1BN of potential value

3) As Aerospace Remainco will be 50% larger than its closes competitor (GE), it could garner a valuation premium to reflect its better economies of scale, etc. A 10% premium would add $8.3BN of potential value.

 

Including all the upside drivers, you get $146.6BN or $170 per share (~49% upside). Of course this won't happen over night (the spin process could take up to 24 months).

 

Anyone know the bear case? From my perspective its Otis and Carrier businesses are pretty cyclically exposed should we enter a recession. However, aerospace is very well positioned from a secular perspective (growing middle class globally is travelling more and more). https://www.statista.com/statistics/564717/airline-industry-passenger-traffic-globally/

EBIT multiples over 8 tend to make my palms sweat in general; the recent carnage likely compresses the current multiples...

 

There will also be forced selling.  This may be a wait and watch scenario...buy your favorite piece or all three after breaking up

 

[rb]

Just a couple of points. Stock spinoff missed the value of chub in there. It's on the sales block right now. UTX is looking for about $3 billion. In regards to the geared turbofan engines, those sell for negative margins. So as volumes ramp up losses cash losses will increase not decline.

[stockspinoffinvesting]

Thanks for the catch on the sale of Chubb. It is embedded in my valuation of Carrier as my valuation uses TTM EBIT for the climate, control, fire safety and security business (so Chubb's contribution to EBIT is included).

 

To clarify regarding the GTF losses. Eventually (Bloomberg estimates by 2023), once volumes have ramped up significantly, the geared turbofan engine sales will be profitable. So the $1BN of losses will go away. Granted this is 4 years away. So there will be significant program losses in the near term but the loss will be eliminated in the long term.

[wolverine890]

Does anyone have a good primer/book on UTX?

[Spekulatius]

Anyone looks at UTX or RTN. It looks like each sharecount RTN gets converted into 2.335 newco shares and each UTX into one Newco share. UTX trades at a warrant and so does OTIS and CARR (Carrier). Carrier is an interesting business, but they loaded it up with too much debt imo ($10.7B). I have not looked at OTIS yet.

 

UTX will take its lumps due to commercial aerospace exposure, but it’s a good business longer term. Raytheon’s  defense business will help stabilize them until it blows over. It‘s like Boeing without the catastrophic risk.

[Castanza]

Anyone looks at UTX or RTN. It looks like each sharecount RTN gets converted into 2.335 newco shares and each UTX into one Newco share. UTX trades at a warrant and so does OTIS and CARR (Carrier). Carrier is an interesting business, but they loaded it up with too much debt imo ($10.7B). I have not looked at OTIS yet.

 

UTX will take its lumps due to commercial aerospace exposure, but it’s a good business longer term. Raytheon’s  defense business will help stabilize them until it blows over. It‘s like Boeing without the catastrophic risk.

 

I edged back into RTN today. Nothing substantial, but hoping to add in pretty good size over the next few trading days/weeks (pending price movement). Not many thoughts on the merger. Simply adds to the already diverse portfolio of RTN. Long term play for sure.

[Xerxes]

I am a UTX holder from a while now.

Was planning to be long term holder of OTIS and Carrier, but will most likely sell those right out of the gate and plow them back into RTX.

 

For sure, we got headwinds in the aerospace industry in the short term, but I do know that even without the Raytheon defense business, the Pratt & Whitney and Collins businesses are an excellent bet if one things that there would be renewed tailwind in the commercial sector.

 

Between tier-one supplier like UTX and OEM (like Boeing), I would go with the tier-one supplier any day given their razor-blade cashflow profile.

OEM's cashflow profile tend to be very in sync. with their production rate and we have all seen MAX woes.

[KJP]

Anyone looks at UTX or RTN. It looks like each sharecount RTN gets converted into 2.335 newco shares and each UTX into one Newco share. UTX trades at a warrant and so does OTIS and CARR (Carrier). Carrier is an interesting business, but they loaded it up with too much debt imo ($10.7B). I have not looked at OTIS yet.

 

UTX will take its lumps due to commercial aerospace exposure, but it’s a good business longer term. Raytheon’s  defense business will help stabilize them until it blows over. It‘s like Boeing without the catastrophic risk.

 

I looked at it quickly a few days ago.  If you take the prices that Carrier and Otis are trading at on a when-issued basis, the remaining UTX should trade at about $51/share, which is consistent with RTN's current after-market price (51*2.3348=$119/RTN at $118.50).  RTN has essentially no net debt, and UTX is shipping almost $17 billion of debt off to Otis and Carrier.  So, using round numbers, the combined UTX/RTN should have around $25 billion in net debt, producing an enterprise value of around $110 billion, which I believe is ~11 - 11.5x 2019 EBIT, excluding RTN's significant CAS/FAS adjustment.  The company would be levered around 2.75x EBIT.