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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

United Tech

October 22nd 2015

United Tech
NYSE Symbol: UTX
Industry: Industrial conglomerate
Price as of 10/21: $97.97


                It's October and on que the markets are rallying, but not all sectors are rallying. The oil sector remains under pressure and may remain so for another quarter or two. There doesn't seem to be a rush to buy that sector. The healthcare has been the most disturbing sector of late. Yesterday's example of Valeant dropping nearly 50% before recovering half the losses due to a negative research report seems to drive home the case that healthcare has lost its leadership role. But which sector will take its place? The industrials are making a case for their sector following better than expected earnings from GE, GM, Boeing and this week's stock of the week, United Technologies (UTX). United Tech is an Industrial conglomerate with divisions including Otis which manufactures freight elevators, escalators, and moving walkways, Carrier known for their air conditioning units and Pratt & Whitney segment which supplies aircraft engines for commercial, military, business jet, and general aviation markets. United Tech's earnings and stock have been lackluster of late due in part to China. The stock has been hovering around a 2 ½ year low, but recently perked up. Following lackluster earnings this week, the stock jumped 4% following a $12 billion share buyback. The company indicated this was the best way to use their cash buying back their stock at levels they believe to be below its intrinsic value. Investors are hoping this is a signal of a break out for business fundamentals and the stock. Technical analysts believe the stock made a head and shoulders bottom which typically bodes well for the stock longer term. In any event, the company and the stock hopefully are washed out and when China and the fundamentals, United Tech looks to have good upside.

                In the short term, United Techs earnings will remain under pressure due in part to slow growth from China.  The third quarter earnings came in at $1.61 a share from continuing operations in the third quarter, down 17% from a year earlier, but beating estimates by 6 cents. Net income fell 19% to $1.4 billion. It was the company's first earnings decline in five quarters and its third straight quarterly revenue shrinkage. Part of the revenue decline was due to a strong dollar and a delay in jet engine deliveries at its Pratt & Whitney division. United Tech's Otis unit saw sales fall 9% to $3.04 billion while operating profit slid 8% to $642 million. New equipment orders rose 47% in North America but fell 19% in China. Overall, Otis' new equipment orders rose 2%. Pratt & Whitney revenue dropped 9.2% to $3.23 billion. Sales at its UTC Climate, Controls & Security unit, including Carrier air conditioning, slipped 1.7% to $4.28 billion. UTC Aerospace sales declined 2.2% to $3.46 billion.

                 Basically, not a lot of great news in the quarter, but at least the company didn't lower guidance. Going forward, United Tech is looking to make amends. The company expects to sell its Sikorsky helicopter unit to Lockheed Martin for $6 billion in net cash. The board authorized $12 billion in buybacks, with $16 billion in share repurchases planned by 2017. For the 2015-2016 years, United Tech is returning $17 billion in cash to shareholders, equivalent to 20% of the market cap. Even without the share buyback, United Tech looks attractive trading for 15.7times earnings, 14.75 times 2016 earnings. Analysts are expecting more robust earnings growth in 2017 thanks to recent investments. Catalysts include the sale of Sikorsky by year-end and a December 10 investor meeting where United Technologies will offer specific 2016 guidance.

        In the short term, business will remain under pressure at United Tech, but with the stock still trading at a 2 ½ year low, a lot of the bad news has been priced into the stock. Plus the company pays a nice dividend of 2.6% while you wait for the fundamentals to improve. The announced $12 billion buyback seems like a catalyst to get the stock and the industrials moving again. If China can reaccelerate earnings, United Tech could become a market leader once again.