A slow fourth quarter doesn’t diminish our enthusiasm for the firm’s long-term value creation potential.
We’re maintaining our fair value estimate of $122 per share for wide-moat United Technologies
after fourth-quarter earnings. With many industrial peers looking fully priced to slightly overvalued, we still see shares of United Technologies as a top pick. We expect it will struggle to grow earnings in the near term as it faces the steep Geared Turbofan production ramp and works through pricing pressure in Otis China; however, we continue to believe that the firm's portfolio is primed for significant longer-term value creation.
Barbara Noverini is a senior equity analyst for Morningstar.
Consolidated revenue grew 3% year over year to $14.7 billion in the quarter on a reported basis, but this masked otherwise flat organic sales in all business lines. In the Otis elevator segment, strong new equipment sales of 13% and 7% in the United States and Europe, respectively, were dragged down by steep declines in the Middle East and ongoing weakness in China. Although Chinese new equipment orders were flat in the quarter on a dollar basis, units were up 5% year over year, outpacing management’s estimate of mid-single-digit declines in the broader Chinese elevator market. This result validates Otis’ strategy of re-engineering the product line to capture more share, a trend that could gain momentum in the coming quarters.
Pratt & Whitney delivered 62 GTF engines in the fourth quarter, over 40% of the 138 full-year total. Although Pratt missed its initial target of 200 deliveries, work to alleviate fan blade production issues is already underway, strengthening our confidence in 2017’s target of 350 to 400 engines.
Adjusted segment operating margins fell 40 basis points year over year to 15.3% in the quarter. Higher negative engine margin and production ramp costs weighed on Pratt, while increased R&D costs and pricing pressure crimped profitability at Otis. That said, aftermarket growth and cost reduction expanded margins in aerospace systems, while Climate, Controls, and Security also benefited from favorable commodity costs.
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