United Technologies (NYSE:UTX) just reported great earnings, and analysts have been pounding the table for the stock. But can earnings turn around the recent downtrend in UTX stock thanks to China?
United Technologies has been trying to buy Rockwell Collins (NYSE:COL), and the deal is now before government regulators around the world, since both are global companies. This includes China, which could now refuse the deal as it previously refused Qualcomm’s (NASDAQ:QCOM) bid to buy NXPI (NASDAQ:NXPI), the Dutch chipmaker.
The U.S. government approved the $30 billion deal on Oct. 1, but China has yet to sign off on it, even though the two companies said they were close to getting approval last month.
While the two companies continue to insist the merger is “on track,” investors are no longer so certain. UTX stock is down 9% since Oct. 3, and shares in Rockwell Collins are down 8%.
But the United Technologies Earnings
This obscured quarterly results, announced before the market opened Oct. 23, with sales up 10% year over year, and the company raising its earnings estimates for the full year by 10 cents, to $7.20 to $7.30 per share, and its estimate on revenues by $500 million, to between $64 billion and $65.5 billion.
For the quarter the company earned $1.238 billion, $1.56 per share, on revenues of $16.5 billion. On an adjusted basis, however, the earnings came in at $1.93 per share, well ahead of estimates of $1.81 per share, and even a “whisper number” of $1.86.
If the company hits its current targets it would have a price to earnings ratio of 17.5 at the October 23 stock price, lower than the market, and the stock’s dividend yield would be 2.33%, a solid buy.
In a rational world, this would be providing lift to the shares. They were down in the pre-market then opened roughly flat, after falling $2.28 per share on October 22. Then rationality returned, and they were up almost 2% in early trade.
But there’s something else going on.
The Break Up That Isn’t
United Technologies CEO Greg Hayes said in September that the Rockwell deal was on track and the company was moving ahead with plans for a break-up of the company into three pieces, one devoted to aerospace and its Pratt & Whitney brand, one devoted to intelligent buildings and its Carrier brand, and the Otis Elevator unit.
The idea would be to “unlock value” in the aerospace unit. Management sees their assets as being dramatically outperformed by rival Honeywell (NYSE:HON). Some analysts feel the pieces are worth 20-50% more than the whole.
The problem is that if China doesn’t approve the Rockwell acquisition, the breakup plan makes no sense, as there wouldn’t be enough aerospace assets to make the deal worthwhile. Over the last year, as the Qualcomm-NXPI deal was delayed repeatedly and then discarded, NXPI is down 34%.
The same fate could befall the partners here, with both stocks falling from their recent highs. Add to that the lost opportunity in the UTX break-up, and you have some very sad traders. As TV analyst Jim Cramer said recently, companies with fortunes tied to China “are guilty until proven innocent” amid talk of a “Cold War.”
Buy UTX Stock Anyway?
The rational course would be to buy United Technologies stock on weakness anyway, given the excellent support for the dividend and its relatively low valuation.
United Technologies has nearly $9 billion of cash on its books, against long term debt of $25 billion, and total assets of $97 billion. Today’s earnings report shows cash flow from operations at $1.8 billion, bringing the total for the year so far to $4.3 billion, near the company’s annual target of $4.5-$5 billion.
Rockwell Collins would seem to be the stock to drop, given the NXPI debacle
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
