On Apr 1, 2015, Zacks Investment Research downgraded diversified conglomerate United Technologies Corporation UTX to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold). Despite the relative weakness, the stock is currently trading at a forward P/E of 17.0x with long-term earnings growth expectation of 9.9%.
Why the Downgrade?
At present, United Technologies seems to be facing challenges on most fronts, and it would be prudent for investors to remain on the sidelines for some time. The company has trimmed its earlier guidance for 2015 due to strengthening of the US dollar and additional pension discount rate headwind. United Technologies presently expects total revenue in 2015 to aggregate within $65 billion and $66 billion, slightly down from $66 billion and $67 billion anticipated earlier. Earnings are anticipated to vary within $6.85–$7.05, down from $7.00–$7.20 per share. The current Zacks Consensus Estimate for 2015 is pegged at $6.99.
Most of the earnings estimates for the company have been revised downwards in the past 30 days, signifying negative investor confidence. United Technologies is currently contemplating the divesture of its Sikorsky helicopter division to revamp its portfolio (Read: United Technologies to Spin off Black Hawk-Maker Sikorsky?). With annual sales of about $7.5 billion, Sikorsky generated about 11.5% of United Technologies’ annual revenues of $65.1 billion in 2014. Approximately two-thirds of Sikorsky revenues are attributable to the defense sector, which has witnessed softness in recent times as government budget allocations have contracted. In addition, top-line growth of the segment has been adversely affected by a relatively weaker demand from oil-field services companies following the steep drop in crude-oil prices.
Consequently, it is prudent of United Technologies to offload the baggage of a laggard unit that represents the smallest of its five major business units. Gregory Hayes, the CEO of the company, is not averse to such a risk that involves certain tax complications. However, some analysts believe that the spin-off would be more symbolic in nature and would fail to add any optimal value to the $107.9 billion market cap of the conglomerate.
Over the last one-year period, United Technologies has performed relatively weaker in comparison to the overall S&P 500 with an average return of -0.6% compared to 9.7% for the benchmark index. A downgrade in the Zacks Rank serves as one of the triggers to exit certain underperformers at the right time to maximize portfolio returns. Selling off losers can at times be difficult, but with the continuous share price decline since mid-Feb, it seems to be an opportune time to get rid of this stock before more losses hit your portfolio.
Other Stocks to Consider
Some other notable companies in the industry include Compass Diversified Holdings CODI, Icahn Enterprises, L.P. IEP and AO Smith Corp. AOS, each carrying a Zacks Rank #2 (Buy).
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