United Technologies Challenged Until 2017

• Shares of United Technologies Corporation UTX have declined 19 percent year to date, falling over 26 percent in the last six months.
• Barclays’ Carter Copeland has downgraded the rating on United Technologies from Overweight to Equal Weight, while lowering the price target from $120 to $100.
• The EPS expected for 2016 has declined 15 percent in less than one year, and Copeland prefers to remain “cautiously optimistic” about the company’s recovery prospects.

Copeland also mentioned that visibility into 2017 was still low, with lower potential for multiple expansion “on what we see as a very rare up-revenue/down-EPS year in 2016.” While there is expected to be growing pressure on the Otis China volumes, there is also likely to be pressure associated with Fx across some areas of growth that had so far helped to partially offset declines.

Also, while GFT engine headwinds are already expected at Pratt, there is also likely to be headwinds from the C-17 line closure that are not yet factored into the numbers. Moreover, “2015 incremental margin performance at UTC Aerospace Systems signals that new program mix is a bigger challenge than we previously thought,” the Barclays report stated.

In addition to all this, 2016 also appears to be increasingly challenged due to higher risk in the shorter cycle markets, such as container refrigeration, along with potential weakness in the cargo-related aftermarket and lower pension tailwinds than earlier expected.

Although United Technologies had, for years, touted the counter cyclical balance of its portfolio as the key reason for its consistent and resilient growth, Copeland now believes that this model is broken.

“Several unique aero pressures are making the UTC aero businesses less of an offset to weakness elsewhere just as very large Goodrich synergy capture is completing,” the report added, while mentioning that CCS is the only remaining growth engine for the company and is inadequate to be able to carry the entire company.

For now, there does not appear to be any solution to the challenges till 2017.