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UTX Earnings: Has Wall Street Set the Bar Too Low?

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United Technologies (UTX) is scheduled to release its third-quarter earnings results on October 22 before the market opens. UTX has returned 28.5% year-to-date, significantly outperforming the Dow Jones Industrial Average (DIA), which has returned 14.8% in the same period.

Among its peers, Boeing (BA) is scheduled to release its earnings results on October 23. Lockheed Martin (LMT) is scheduled to release its earnings on October 22. Analysts are expecting the company to report EPS of $5.02.

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United Technologies–Raytheon merger

UTX’s shareholders recently approved its merger with Raytheon (RTN). This merger will create the world’s second-largest defense company after Boeing. Initially, after the proposed merger’s announcement, several activist investors, including Dan Loeb’s Third Point and Bill Ackman’s Pershing Square, opposed it. UTX is also set to split into three separate companies related to aerospace, air conditioning (Carrier), and elevators (Otis). After this split is complete, the aerospace division will merge with Raytheon.

Second-quarter results topped analysts’ estimates

UTX reported EPS of $2.20 in the second quarter, which topped analysts’ estimates. The company also increased its 2019 earnings guidance for the second time in 2019. Now, the company is guiding for EPS of $7.9–$8.05 in 2019. At the Morgan Stanley 7th Annual Laguna Conference on September 12, UTX CEO Greg Hayes said that the EPS accretion from Rockwell Collins should be north of $0.50, which is currently in the forecast.

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Strength in the aerospace market to benefit UTX

During the second quarter, the company upgraded this figure from $0.35. The bump could mean investors see the company revising its EPS guidance for a third time this year. Hayes also noted the strength in the commercial aerospace aftermarket. Aerospace has been one of the best-performing industrial end markets. This should also mean that the company’s aerospace division is likely doing well in the third quarter.

Earnings estimates for UTX

As per the consensus compiled by Thomson Reuters, analysts expect EPS of $1.89 for the third quarter, up 22.8% YoY (year-over-year). The third-quarter revenue estimation for the company stands at $19.3 billion, which implies an increase of 16.8% YoY.

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UTX’s EPS: Is the bar set too low?

Due to the strength in UTX’s end markets and Hayes’s bullish comments, many analysts believe that the company can beat the EPS estimate. Recently, Josh Sullivan, Seaport Global’s industrials analyst, increased his EPS estimate for UTX from $1.96 to $2.05. The analyst has a revenue estimate of $19.39 billion. As per CNBC, he attributed the bump in the EPS estimate to “continued strength in the aerospace aftermarket” and strength in Europe.

CNBC also noted Cowen’s bullishness on UTX. Cowen’s analyst is expecting the company to report EPS of $2.07 in the third quarter. The analyst also noted that the company had beaten estimates by an average of 7% in the last 21 out of 22 quarters: “Given its record, a ‘miss’ seems particularly unlikely in front of its spins and the proposed Raytheon merger.”

Given Wall Street’s bullishness and UTX’s historical record, it’s likely that the company will beat the consensus estimate. However, given the anticipation of this already happening, the stock might not rally significantly on a small beat. A guidance upgrade, on the other hand, could give it a boost.

Stay tuned—we’ll provide a post-earnings analysis of United Technologies on October 22.

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