United Technologies Offers Air Cover Amid Slowdown Worries
(Bloomberg Opinion) -- United Technologies Corp.’s latest results suggest aerospace is still a safe place as worries mount about a slowdown in global growth.
The $96 billion conglomerate that’s planning on splitting itself into three reported a staggering 11 percent gain in revenue excluding the impact of M&A and currency swings for the final months of 2018. That was the first time quarterly organic growth stretched into the double digits since 2007, according to Bloomberg Intelligence. The increase was driven primarily by United Technologies’ Pratt & Whitney unit, where sales of its new geared turbofan jet engine drove a 22 percent surge in organic growth. The Collins Aerospace Systems segment — recently dubbed as such following the November close of the company’s $30 billion takeover of Rockwell Collins Inc. — posted a 9 percent gain in revenue excluding the impact of that acquisition.
United Technologies’ strong showing won’t mitigate concerns that the best growth is behind industrial companies. The company predicted global GDP growth would slow to 2.9 percent in 2019, compared with 3.2 percent in 2018, the latter of which was revised down from a 3.3 percent outlook this time last year. Its own blistering pace isn’t expected to last, either: United Technologies forecasts organic sales growth of 3 percent to 5 percent in 2019, compared with 8 percent for the full year in 2018. But that’s still a comfortable gain and likely veers toward conservatism as management plays it safe in an increasingly uncertain world. Contrast that with 3M Co.’s prediction of 2 percent to 4 percent organic sales growth in 2019, an outlook analysts already think is too optimistic.
What this suggests is that even though sales may have peaked, those companies with significant aerospace exposure still have room for positive surprises. Despite its more subdued economic forecast, United Technologies expects demand for air travel to remain strong, with revenue passenger miles climbing 6 percent in 2019, compared with 6.5 percent growth in 2018. This bodes well for Honeywell International Inc. and Boeing Co.’s results next week.
For United Technologies specifically, its latest results also reinforce the logic of its plan to separate out its Otis elevator and Carrier climate-control businesses to focus on its aerospace operations. In contrast to the ballooning sales at the Pratt & Whitney and Collins divisions, orders for new Otis equipment were flat organically in the fourth quarter relative to the prior year, while orders at Carrier were up 3 percent.
The breakup has been under scrutiny as investors grumble about the 18-month to two-year timeline United Technologies has laid out for executing a split, and question the wisdom of spinning out two major companies in what may end up being a softening economy. These are fair questions. It will help that the company laid out a more specific breakup schedule as part of its earnings presentation on Wednesday. United Technologies said it would be operationally ready to carve out the Otis and Carrier units by the end of 2019. After that, its timing would be dictated by the obtainment of tax rulings. United Technologies also spelled out its free-cash-flow outlook in laborious detail. This should ease concerns about its weaker-than-expected cash-flow forecast for the Rockwell Collins business upon the deal’s closing. The shortfall was more a reflection of integration costs and higher interest expenses than any meaningful deterioration in the business.
At the end of the day, United Technologies’ conglomerate structure hasn’t made sense for a while and its businesses’ contrasting growth and margin profiles have long muddied up its earnings picture. This recent quarter is giving investors a sneak peak at what an aerospace-focused United Technologies would look like, and there’s good reason to like what they’re seeing.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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