RBC Downgrades United Technologies; Stock Falls

In a report issued Tuesday, RBC analysts Steven Cahall, Robert Stallard and Deane Dray downgraded United Technologies to Sector Perform on three key issues.

1. Wider Industry Fundamentals Unchanged

Similar to other “economically driven industrial stocks,” United Technologies has surged about 10 percent in the last couple of weeks, doubling the performance of the S&P 500. However, the experts see no visible changes to the company’s or wider industry fundamentals, and thus believe this is a convenient point to move to the sidelines.

Related Link: United Technologies Challenged Until 2017

2. Growth Obstacles

The company faces two major growth challenges. On the one hand, the analysts expect China OEM order and sales for Otis to decline in the third quarter of the year, while management is also looking to use price to regain share. On the other hand, the aerospace industry does not seem to be getting better.

RBC is “basically looking to US construction and defense for potential organic upside going forward, and these markets only make up 40 percent of segment operating income (post Sikorsky).”

3. Focus On Buyback

The analysts expect United Technologies to focus on its share buyback program, in an attempt to offset the complicated organic situation. “With organic cash generation and the Sikorsky proceeds, we have UTX spending $7 billion on stock buybacks in 2016,” they explained.

“How exactly this flows through to EPS remains to be seen, and that could be a source of upside if say the company closes Sikorsky quickly and does an accelerated repurchase. But this would be a 'one off', and cannot be repeated in 2017.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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