If you’ve owned United Technologies Corporation (UTX) stock any time in the past year, you don’t need me to remind you of your misfortune.
Still, the Dow component and industrial behemoth is a bellwether for large-cap industrial stocks, and as such all investors need to take note of UTX stock’s recent struggles. More importantly, we need to take note of why UTX stock is under fire and why it could remain so for some time.
On Thursday, UTX hit another new 52-week low, dragging down its year-to-date performance to a loss of nearly 25%. That performance is pitiful when compared to other big industrial conglomerates such as Boeing (BA), General Electric (GE), General Dynamics (GD) and Raytheon (RTN).
Struggling Chinese Economy Is a Drag on UTX Stock
It’s no coincidence that the plunge in UTX over the past several months coincides with renewed concerns over the slowing Chinese economy.
United Technologies does a lot of business in China, especially via its Otis Elevator division.
That division profited mightily during China’s construction renaissance, but slower growth in the world’s second-largest economy, along with currency and stock market volatility there, has brought sellers out of the UTX woodwork.
Recent China data has created a further pile on for UTX. On Wednesday, we received the Caixin-Markit Flash Manufacturing Purchasing Managers Index, or “flash PMI.” That report was rather bleak, missing expectations and showing worsening conditions in industrial output, prices, employment and demand.
United Technologies admitted in July that its Otis business was pressured by the struggling Chinese economy. Management also said it doesn’t expect next year to be much better.
“I think it’s not too difficult to project that China is likely to be down next year…in terms of new equipment,” said UTX CFO Akhil Johri.
United Technologies doesn’t just rely on building in China for its sustenance. The company is, perhaps, better known for its Pratt & Whitney division, the world’s leading supplier of aircraft engines for commercial, military, business jet and general aviation. Still, with a glowing lack of growth in its China-related operations, revenue and profits are likely to come under pressure for some time.
Analyst Downgrades Across the Board
Considering the China headwinds currently blowing down UTX, it should come as little surprise that UTX stock has seen a rash of analyst downgrades and price target cuts this summer.
For example, in late June, Zacks lowered its rating on UTX from “hold” to the dreaded “sell.” In late July, Cowen and Company actually upgraded UTX from “market perform” to “outperform,” although the firm did lower its price target price on UTX from $125 to $119.
In August, Barclays downgraded UTX from “overweight” to “equal weight,” while also cutting its price target from $120 to $100. Citigroup analysts cut their price target on UTX shares from $119 to $107, although the firm did put a “buy” rating on the stock (I suspect, in large part, due to valuation).
Given the current share price of just over $86, I suspect even the most bearish UTX analysts will have way overshot the price target by year’s end.
Bottom Line on UTX Stock
To help remedy some of its current difficulties, in September United Technologies announced a reorganization that would operate subsidiaries Otis Elevator and United Technologies Climate, Controls & Security as stand-alone businesses.
The move is no doubt designed to sharpen UTX’s focus on its core aerospace and defense businesses. From a logic perspective, the reorganization makes sense.
Unfortunately for those who own UTX, the market isn’t responding positively to the news, as UTX stock is down some 6% since the Sept. 10 announcement.
For the UTX bulls, the reorganization could be a long-term positive for the stock. However, if you have any worries over China’s economic growth and the resultant slowing in the global economy (don’t we all?), then it might be a good time to bail out of UTX.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.