United Technologies Corp: Here’s Why I’m Bullish on UTX Stock

UTX StockUTX Stock Has Suffered from Production Delays, but Improvements Are Coming

United Technologies Corporation (NYSE:UTX) has been under pressure over the past few weeks. The bears have come out for UTX stock in large part because its aircraft engine division, Pratt & Whitney Canada Corp, lowered its delivery targets because of production problems. Pratt & Whitney carries a lot of prestige within United Technologies (UTC).

The company has worked to improve the situation. UTC will have to take a revenue hit this year, but its 2017 prospects are much better.

Pratt & Whitney makes engines for fighter jets and was one of the suppliers for the original Boeing Co (NYSE:BA) “747” series with the “JT9” engine. When Pratt & Whitney sneezes, UTX stock catches a cold and suffers. But, while the production delays are no doubt a nuisance, they concern a new line of niche engines known as “Geared Turbofans” (GTF). They represent the newest in civilian aero-engine technology. New technologies in the aerospace field rarely end up resulting in on-schedule delivery performance.

Here’s How You Should Look at UTX Stock

Here is a more constructive way of looking at the problem. Pratt &Whitney will deliver more than 150 new-generation aircraft engines this year (“PurePower”), against 200 planned earlier, according to UTC’s CEO Gregory Hayes. These engines are supposed to equip the Airbus SAS “A320neo,” the Bombardier, Inc. (TSX:BBD.B), and the  Mitsubishi “MRJ.”

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From an investment and return point of view, the way to look at Pratt & Whitney and its significant impact on UTC stock is that the problem will be resolved by next year. These are teething problems. The new engine has acted like a vaccine injection: a bit of short-term pain for long-term gain. GTF technology, once perfected, will spread throughout the Pratt & Whitney engine lineup. Now the engines are targeting the smaller airliners. Eventually there will be larger-thrust variants for wide-body planes as well.

As UTC’s CEO Hayes explained: “There are about 800 parts on the [GTF] engine. There are about five parts that are causing us pain this year.” (Source: “UTC CEO: Pratt & Whitney struggling with GTF fan blade learning curve,” Air Transport World, September 19, 2016.) In short, Pratt & Whitney is taking too long to produce the complex aluminum-titanium fan blades. They need to halve the time it takes to produce them. Hayes says they have a plan to achieve this goal and that, by next year, production of the GTF engines will be on schedule.

UTC Is Well on Its Way to Resolving the Delays

United Technologies is discussing with airlines and aircraft manufacturers to adjust their schedules. Airlines are not happy because they will not receive the promised engines. The airplane makers, like Bombardier, aren’t happy either, but they get compensation for the trouble. But, ultimately, the GTF engines are unique and they are key to the planes offering the kinds of performance that won them sales in the first place.

Pratt & Whitney will be late, but the exclusivity of its technology allows it to absorb the impact of delays better than if the delays affected more conventional engines. That’s why in the long run, UTX stock should already have absorbed the impact of the delays. Indeed, the long-term outlook for both United Technologies and UTX stock itself remains bullish. Indeed, UTC has not changed its record 10% organic revenue growth per year from Pratt & Whitney until 2020.

On Wall Street, UTX stock lost over 2.5% on the delay announcement but, by the following session, it seemed as if the worst had passed. The new GTF engines are revolutionary. They are introducing some of the newest technology to jet engines since the advent of the high bypass turbofan over 40 years ago.

As for UTX stock, overall it has performed well in 2016. Despite the high-visibility delays with the GTF, UTX shares are trading over five percent higher year-to-date. UTX is trading at about $100.00 per share now.

However, in 2015, before the production delays, when the GTF was all the rage—when the Bombardier “CSeries” achieved important milestones, highlighting the GTF’s performance—UTX stock hit a record high of $124.11.

This suggests that when Pratt & Whitney resolves its production problems, UTX stock could hit new all-time records in the order of 30% or higher. Analysts at Jefferies Group LLC (NYSE:JEF) have targeted $132.00. Even the pessimists still see an upside of 10% or so. With its problems left behind, UTC is set to take off again. It’s certainly not the time to be bearish on United Technologies.