United Technologies Corp.’s announcement last week that it will cut 5 percent of its global work force and lower earnings estimates has some analysts upset about the conglomerate’s overly optimistic December earnings forecast in the face of a deep recession.
Chief Executive Officer Louis Chenevert projected in December that 2009 revenues would be down about $1 billion from the $58 billion the company recorded in 2008.
In last week’s revision, Chenevert said revenues would likely be closer to $55 billion, while lowering the company’s earnings per share forecasts to between $4.00 and $4.50, down from the $4.65-$5.15 range projected in December.
A maker of aircrafts and aircraft parts, air conditioning units and elevators, UTC’s diversity still makes the company favorable in the eyes of investment analysts, though they were skeptical about UTC’s December forecast.
Barclays Capital analyst Joseph Campbell said in January that a missed guidance could negatively impact investor confidence in UTC.
“The most important risk we see for UTC is the worry that the UTC [earnings per share] expectations might be missed, thereby undermining one of the most attractive features of UTC shares, namely reliable guidance by the management team,” Barclays Capital analyst Joseph Campbell wrote in a Jan. 22 note to investors.
UTC, which reaffirmed its guidance in February, risks upsetting some investors with the new forecast, said aerospace industry analyst Wayne Plucker.
However, most were satisfied to see the company embrace a conservative projection, he said.
“There’s some talk of, ‘Why didn’t you say this in February?’ But hindsight is always 20/20,” said Plucker, who said UTC’s recent performance looks better in comparison to competitors, like General Electric.
UTC spokesman John Moran said the company noted in its February guidance that volatile economic conditions put the guidance “under pressure.”
“The company informs investors promptly about changes in expectations and will continue to do so,” he wrote in an e-mail.
Investors responded favorably on Tuesday after the company’s announcement. UTC stock jumped nearly 10 percent to close at $40.79.
Cowen and Co. analyst Cai von Rumohr labeled the new forecast a “catharsis.”
“[UTC’s] 2009 guidance cut was widely expected and offers an easier EPS comparison in 2010,” Rumohr wrote in a note to investors.
Though some see UTC’s new guidance as an acceptance of the recession’s impact on core business segments, Deutsche Bank analyst Nigel Coe said the company’s lowered forecast just six weeks after it issued 2008 fourth quarter earnings causes some concern.
“The earnings revision is not that surprising in itself, but the cut is certainly deeper than we had anticipated,” Coe wrote to investors, adding, “We are seeing significant pressure on commercial building installations and business-jet related markets.”
A drop in global housing production negatively impacted UTC’s Carrier Corp. and Otis Elevator Co., and a projected 3 to 4 percent drop in air traffic for this year will hurt Pratt & Whitney. In February, Pratt & Whitney Canada announced it would lay off 1,000 workers because of slumping demand for business jets. Those layoffs will be part of 18,000 jobs UTC will have cut over two years by the end of 2009.
Volatile global currencies also impacted UTC, which generates more than 60 percent of sales outside the country. U.S. exports became favorable early last year as the dollar weakened abroad, but a stronger dollar and weaker global markets has reversed that trend.
The company now expects a $600 million negative impact from currency exchange in 2009.
The company pension cost forecast has also risen over the past few months. In December, UTC said it expected 2009 pension plan costs to increase $100 million over the previous year. In February, it boosted the projected increase to $225 million.
Analysts still look favorably on UTC, pointing to its $4.3 billion in cash reserves and $57 billion order backlog.
However, “people are executing backlog at a slower pace,” Chenevert told analysts during a conference call last week.
Some analysts warned cancellations are likely because of economic conditions. Backlog strength will be “an important driver of share price performance,” wrote Peter Kleinschmidt of Argus Research.
