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Stock Strategist

We See Upside for United Technologies

Sales momentum is positive and strong free cash flow continues at the wide-moat firm.

Mentioned:

 United Technologies (UTX) managed to maintain positive sales momentum in a tepid global macroeconomic environment during the second quarter, benefiting from strong activity in North America and climbing commercial aftermarket sales at Pratt & Whitney and UTC Aerospace Systems. Consolidated revenue grew 1.3% year over year to about $15 billion in the quarter as acquisitions combined with organic revenue growth of 1% to offset modest foreign-exchange pressures. Only the climate, controls, and security segment reported a sales decline, citing weakness in global shipping container activity that continues to affect the Transicold business. Nevertheless, North American residential HVAC activity reached a seven-year peak, setting the segment up for a strong back half of 2016.

Operating margins declined approximately 30 basis points to 16.9%, as 130 basis points of year-over-year benefit from lower material costs and productivity enhancements in the CCS segment was largely offset by higher research and development spending at Otis, as well as costs related to new product cycles at Pratt & Whitney and UTAS. Nevertheless, at $1.4 billion, free cash flow was nearly 100% of net income and 9% of sales, reflecting United Technologies’ cash generation and deployment discipline amid the significant demands of new product development across the organization. We continue to believe that the shares offer upside as near-term volatility in the global macroeconomic environment often seems to steal focus from United Technologies’ favorable longer-term prospects.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.