It’s not a matter of compatibility that keeps Deutsche Bank from celebrating the United Technologies Corporation UTX-Rockwell Collins, Inc. COL union. Neither is it the in-line synergies guidance, nor the lower-than-expected proportion of equity offered.
“For us, the question of why now and at this spread in valuation raises enough questions about the momentum of the core UTX business in ’18 and even ’19 for confidence to falter,” Deutsche Bank analyst Myles Walton said in a Wednesday note.
By Walton’s analysis, United Technologies would be better off repurchasing shares if the company is on track to hit 2020 targets. The post-announcement sell-off of 6.6 percent seemed to indicate that investors share the analyst's sentiment.
What’s The Problem?
As it is, Walton predicts below-consensus performance for 2018 driven by headwinds from Geared Turbofan engine costs and a three-year delay in pursuing buybacks.
The latter indicates slight dilution in stock value ━ a 15-cent earnings per share reduction, according to Wells Fargo estimates.
Deutsche Bank analyst Walton said he the firm projected that UTX would be able sustain repo to offsetn annual creep, "which won't be the case with the COL deal.
“The net implication is 20 million more shares in 2020 than we would have otherwise thought, making the upfront lower equity in the offer less meaningful.”
Walton expects the deal to increase the firm’s 2020 net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio by 1.2 turns, even as it boosts earnings per share from an estimated $8.20 to $8.28 and free cash flow per share from $8.50 to $8.65.
Still, the logic of the merger may lie in sheer opportunity. “Sometimes deals happen when they can happen,” Walton said, noting that upcoming filings may better explain the timing.
Deutsche Bank has a Hold on United Technologies with a price target of $120, while Wells Fargo maintains a Buy with a $130 target. At time of publication, the stock was trading at $109.97.
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