United Technologies (UTX) cut its outlook Tuesday because of even slower growth in China, and that caused UTX stock to plunge nearly 8% early in the session.
The market can only hope that the UTX warning isn’t the start of a wider trend.
Weakness in Europe and China hit more than one of the industrial conglomerate’s segments. The strong dollar didn’t help, either. But, the big worry is that a bleaker macroeconomic picture leads to a rash of earnings warnings from U.S. multinationals.
UTX, whose businesses include everything from elevators to aerospace systems, is getting squeezed on two continents. Europe was struggling even before the Greek debt crisis once again rattled economic nerves. Meanwhile, China’s economy has slowed more than expected.
Together, results at both Otis elevators and the aftermarket for aerospace products has dragged on performance — and will continue to do so.
That’s taking a larger-than-expected toll on the top and bottom lines.
Adjusted earnings managed to exceed Wall Street estimates, but revenue came up short. Even worse, UTX took an axe to its full-year forecast.
The company now expects operating earnings per share to hit a range of $6.45-$6.60. The prior forecast was $6.55-$6.85. Earnings from continuing operations are in the range of $6.15-$6.30, down from $6.35-$6.55.
Furthermore, this year’s outlook includes contributions from United Technologies’ Sikorsky helicopter business, which it just sold to Lockheed (NYSE:LMT) for $9 billion.
UTX Stock’s Downside Momentum
The damage being done by Europe and China amounts to hundreds of millions of dollars in lost operating profits. UTX expects operating earnings at the aerospace segment to fall anywhere from $25 million-$75 million this year. At Otis, profit will likely fall $300 million-$350 million.
Taken together, those two forecasts come with $100 million in uncertainty, which is something the market always punishes.
Slow growth and a strong dollar — it shaved 6 cents per share off earnings — are major headwinds for all multinationals. No surprise there, but if other companies struggled as much as UTX did in the second quarter, this could be a much uglier earnings season than the market expected.
As for UTX stock in isolation, a drop of this magnitude is often a buying opportunity. By forward price-to-earnings, UTX is significantly less expensive than the S&P 500. It has a slightly better long-term growth forecast than the broader market, and it’s committed to restarting growth through mergers and acquisitions.
Click to EnlargeThat said, it’s probably too early to pull the trigger on UTX stock, if only because of the ominous technicals. See the embedded chart, courtesy of Yahoo! Finance.
Shares are closing in on their 52-week low, which indicates momentum to the downside. Worse, UTX stock is in the early stages of carving out a death cross — a sell signal triggered when the 50-day moving averages crosses the 200-day moving average from above.
Even if you think technical analysis is like reading the entrails of sheep, it can become a self-fulfilling prophecy if enough market participants decide to heed the warnings of the chart.
UTX stock will recover from this blow, but it would be wise to wait for this selloff to burn itself out before committing new capital.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.