United Technologies To Remain High Disciplined In M&A Markets, Credit Suisse Predicts

Credit Suisse’s Julian Mitchell maintained a Neutral rating for United Technologies Corporation UTX, with a price target of $102, following investor meetings with CEO Greg Hayes in Europe.

“Following considerable changes / surprises in 2015 (segment leadership, Sikorsky, guidance cuts), UTX is likely to be much more settled this year,” analyst Julian Mitchell wrote. Demand in the US and China in Otis and CC&S appears to be steady in the near term. The weaker dollar is likely to support the company’s EPS guidance for 2016.

Management is stepping up its cost-cutting efforts, and appears “fairly confident of putting a floor” under Pratt op margins at 11 percent and Otis op margins at 19 percent, Mitchell mentions, while adding that progress is being made on the GTF and Otis OE share and service turnarounds.

M&A Approach

Management believes that the most attractive M&A is the company’s own stock. Therefore, acquisitions above $5bn appear unlikely, since these would call for equity issuance. In CC&S, acquisitions of $1bn were undertaken in 2015. Although several larger deals have been explored over the past 12 months, valuations have been challenging, and “there are constraints given UTX's high market shares in HVAC and F&S, as well as its tax domicile,” the analyst commented.

In Aerospace, deals may be attractive only in parts of the supply chain given valuations and the relatively advanced stage of the commercial aero cycle. In adjacent markets, avionics seems to be “a better fit for UTX than interiors products such as seats,” Mitchell said.

“In short, we think management will remain highly disciplined in their M&A approach (particularly given the share price), so we see a low probability of a large deal which investors find unattractive,” the Credit Suisse report noted.