United Technologies: Global Growth Holds Up

The housing downturn hurts its U.S. results, but rapid growth elsewhere is boosting sales of elevators, air conditioners and jet engines

by Ben Steverman

Profits from United Technologies (UTX) Jan. 23 shone a glimmer of sunlight into an otherwise gloomy fourth-quarter earnings season.

The conglomerate's strong global sales swamped some softness in the U.S., where a weak housing market has hurt its Carrier air conditioning business.

That storyline — overseas growth but weakness at home — has been repeated over and over again by large U.S. industrial firms in the past year. But recently many have worried the story could take a darker turn. The U.S. outlook could get even worse if the economy falls into recession, and the global party could end if U.S. weakness starts to spread overseas.

United Technologies tried to reassure investors Jan. 23.

"Although 2008 may be a tougher economic environment, we continue to see another solid year ahead," Greg Hayes, vice president of accounting and finance told analysts. Assisting the company are its "geographic balance, the continued worldwide infrastructure buildout, our emerging market presence and our solid execution capability."

Before its fourth quarter earnings report, United Technologies' shares had lost 12% from the beginning of 2008. That roughly matched declines seen throughout the market. Shares rebounded 5.6% Jan. 23, to end the day at $71.01 per share.

United Technologies owns Otis, which controls 75% of China's booming elevator market. Subsidiary Pratt & Whitney, a maker of jet engines, has benefited from strong demand for jets around the world, especially in Asia. Carrier's heating, ventilation and air conditioning business has also raked in earnings on booming global infrastructure.

Earnings of $1.08 per share beat analysts' estimates by 2 cents and topped last year's earnings by 23%. Revenues were $14.7 billion, up 15% from a year ago. The weak U.S. dollar helped boost the dollar value of oversea revenue, making up five percentage points of the revenue growth and two points of United Technologies' earnings growth.

Executives said the declining U.S. housing market was a "significant drag" last quarter. The North American residential market makes up about 5% of United Technologies' sales. The company expects another drop in housing starts, perhaps of 24% or 25%, in 2008.

However, commercial construction in the U.S. remained strong last quarter, and the firm saw strong growth in several other areas, including aerospace and in China and elsewhere overseas.

"Balance works," Hayes said.

As a maker of aerospace equipment, United Technologies is a large defense contractor. That's a classic defensive sector in recession, because government defense spending is often insulated from broader economic trends. Here, unit Sikorsky won the largest contract in its history in December, a $7.4 billion, five-year deal to build helicopters for the U.S. Army and Navy.

"Our strong outlook for aerospace and international infrastructure outweighs our concerns about a slowdown in the U.S.," wrote Standard & Poor's equity analyst Richard Tortoriello.

Or, as Oppenheimer analyst Myles Watson put it, "geographic and industry diversity should provide enough balance in rough waters." About 60% of sales come from outside the U.S., while 60% of sales are commercial and industrial products and 40% aerospace and defense, he wrote.

But what about the prospect that, as some fear, global growth will slow, particularly in export-dependent economies like China?

United Technologies executives sounded confident that the global infrastructure build-out was on track. In other words, skyscrapers relying on Otis elevators would keep rising over Chinese cities at a rapid rate.

"The trends that are driving growth in Asia do not look to slow down in the near term," Hayes said, pointing to 17 million people per year in China migrating from farms to factories.

"Urbanization is a powerful force, and it is what has been driving the business really for the last five years," both sales of Otis' elevators, Carrier's air conditioning equipment, and aerospace, where India and China are putting in record aircraft orders. "So, Asia looks to remain solid," he says.

Outside Asia, there are more questions. Europe may slow a bit but still grow, Hayes said, while U.S. nonresidential construction may slow but still be "fairly strong" in 2008.

Investors are hoping that a U.S. recession doesn't unexpectedly derail these trends in future quarters, snuffing out some of the only bright spots in a very nervous stock market.

Steverman is a reporter for BusinessWeek's Investing channel.