Is UTC Misunderstood on the Street?


By Diane Brady United Technologies Corp. has a problem. Its name often conjures up images of old-style factories and big machines -- if it conjures up any image at all. Until September 11, its CEO had beat expectations and delivered impressive growth for 28 quarters. Despite the accomplishment, few seem to know his name (George David).

The stock (UTX), while up from as low as $40 a share in the days after the September 11 attacks, is more than $30 below the $87 highs it hit last May. And some observers think that unless UTC makes some fundamental changes to its cost structure or product mix, the $55 range is about as good as it gets for the foreseeable future. Talk about a well-run company in a tough spot.

MARQUEE NAMES. Although UTC itself may not register on many investors' radar screens, it owns such marquee names as Otis elevators, Pratt & Whitney jet engines, Sikorsky helicopters, Carrier air conditioners, and Hamilton Sundstrand aerospace systems. In the short term, though, a number of those names are synonymous with the fallout of September 11.

Pratt & Whitney-powered planes are among the first to be parked, as they account for most of the nation's older commercial jets. Hamilton Sundstrand will see its margins squeezed as aircraft manufacturers struggle to keep costs down. Carrier was already seeing sales dampened by the economic downturn, while less construction activity means fewer elevator installations for Otis.

David himself was first out of the gate to tell shareholders that the post-September 11 downturn could slice up to $250 million from fourth-quarter profits, and that sent his company's stock down 26% when trading resumed on Sept. 17 (see BW Online, 11/2/01, "UTC's David: 'We'll Come Back Again'"). While the economic outlook has hardly improved since then, the company has some potential bright spots going forward. Military contracts and a $3 billion order for Pratt's small-engine business in Canada will help offset pain in the aerospace operations, which account for more than half of profits.

DOUBLING IN HEFT? An increased push to digitize operations could easily squeeze out at least $300 million in costs next year. Meanwhile, analysts are hoping new leadership at Carrier will revive that unit's moribund operations. And many hold out hope that David will succeed in doubling his company's heft -- an aspiration cut short last year when General Electric's Jack Welch wooed away Honeywell International mere minutes before it would have joined the UTC camp.

Among the potential partners are Tyco International. While David won't speculate on merger candidates, he does stress: "We would have more financial muscle and reach at twice our size."

Raising UTC's image with the investment community and general public wouldn't hurt, either. When Mark Phillips of ad agency Euro RSCG Wnek Gosper in London began to develop image-building campaigns for the Hartford (Conn.) conglomerate two years ago, he found some resistance. "These guys like to think the facts speak for themselves," says Phillips, whose latest ads feature UTC scientists in dark suits and sunglasses with the slogan: "The Punks Who Killed Heavy Metal."

LOW-KEY. David is a rare-book collector and yacht racer who dislikes quoting slogans and rarely revels in the spotlight. Unlike Welch, whose edicts were treated as gospel within GE, he runs a truly decentralized operation. A.G. Edwards & Sons analyst Kent Newcomb calls it "a fairly conservative, New England-type company that doesn't blow its own horn."

Ask around the company, and it's clear many insiders think the world doesn't give them the credit they deserve. Pratt President Louis Chenevert feels like he "talks to the Street all the time" -- and investors still don't get the point that Pratt is half as reliant on commercial engines as it once was.

Of those who dumped the stock on Sept. 17, Chenevert says, "they probably thought of the business the way it was 10 years ago." Over at the cutting-edge International Fuel Cells unit, staffers grumble that companies like Ballard Power dominate the headlines about fuel cells when it should be them. Others talk about the attention paid to rival parent companies like GE.

WEAK LINK? UTC's challenges aren't about to go away anytime soon. Take Pratt, which accounts for 36% of operating income. Cai Von Rumohr of SG Cowen Securities calls it the weak link, noting that Pratt over the last decade has steadily lost market share in large jet engines to GE and Rolls Royce. It now garners only 5.4% of new big-engine orders, excluding joint-venture projects.

Thanks to the dramatic drop in air travel, Paul Nisbet of JSA Research points out, "a whole bunch of Pratt-powered planes will disappear at once." That means less service revenue. Revenues continue to drop, despite expanding margins from increased reliance on lucrative aftermarket business, small engines, and power generation.

As Nicholas Heymann of Prudential Securities argues: "It's a success in managing to the end of the road, but not a success in taking that road and turning it into an eight-lane highway." Heymann, who has a hold rating on the stock, says the downturn in commercial aerospace could last through 2004.

CHOPPER PROMISE. The performance of other units is somewhat mixed as well. On Oct. 11, David replaced Jonathan Ayers as Carrier's president with Geraud Darnis. While operating margins had crept to 9.4%, from 7.1%, in the past five years, the rest of UTC did better, climbing to 15.6%, from 9.7%. Otis is stronger, in part because it draws 72% of its revenues from service contracts and upgrades. Sikorsky, which makes Black Hawk and Sea Hawk helicopters, is also poised to benefit from increased defense spending. The future of its joint venture with Boeing to create the army's RAH-66 Comanche helicopter is certainly looking rosy.

What dominates David's agenda these days is coping with the aftermath of the terrorist attacks. He admits to being weepy over what happened in New York and Washington, even though he didn't know any of the victims. David also speaks of a new era for America but insists nothing fundamental has changed at his company. In fact, it apparently irks him to have to even get out there and remind people of that.

He'll do whatever it takes, however, to win back Wall Street's confidence. And, with David at the helm, some investors, like former board member Charles Duncan, aren't about to dump their shares. Duncan even insists that, "in time, he will be recognized as one of the stars of American business." Still, barring a big merger or divestiture, even fans admit that UTC's habit of beating expectations could be on hold for now. Associate Editor Brady writes for BusinessWeek in New York


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