Our takeaways from yesterday’s UTX analyst meeting are: (1) recently revised 2009 EPS
guidance of $4.00-$4.50 still appears optimistic at mid-point, though this is true as much
or more so for many in our coverage, (2) UTX is “eyes wide open” about further
downside risk and ready with additional savings initiatives, (3) acquisitions are a priority
in 2009, and (4) the argument for EPS growth in 2010 despite significant late cycle
exposure is supported by cost savings carryover, absence of restructuring expense in
excess of gains, high aftermarket and services (about 40% estimated), falling raw material
costs, stimulus-oriented growth potential for Otis China, likely continued structural
improvement in Fire & Security and Sikorsky margins and growth in military. We are
lowering our 2009-2011 EPS estimates to $3.90/$4.10/$4.70 from $4.55/$4.40/$5.10,
with more conservative assumptions for Carrier, Pratt and Otis as main drivers of EPS
below guidance in 2009.
Implications
We are lowering our 12-month target to $49 (12X 2010 P/E) from $55 on lower estimates
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United Technologies Corp. Multi-Industry
and shift to 2010E valuation focus. However, we maintain our sector-relative Buy rating due to: (1)
still more potential upside to target (+17%) than our coverage on average, (2) significant
company-specific levers to potentially grow EPS in 2010E, and (3) potential that the relative
valuation discount at which the stock now trades (and our target assumes) dissipates if UTX can
grow EPS in 2010E despite high exposure to later cycle non-residential construction and
commercial aerospace markets (65% of revenue).
Valuation
UTX is at 10.7X/10.2X 2009E/2010E P/E, discounts of 9% / 8% relative to peers vs. a historical
average of -10% to +10%.
Key risks
Dilutive acquisitions, pricing pressures, restructuring execution.
2 Goldman Sachs Global Investment Research
United Technologies Corp. Multi-Industry
Goldman Sachs Global Investment Research 3