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Keep This Aerospace Stock on Your Radar

We believe the market is discounting the long-term potential of wide-moat United Technologies' strongest businesses, says Morningstar's Barbara Noverini.

Keep This Aerospace Stock on Your Radar

Barbara Noverini, CFA

Apr 27, 2016

We see opportunity in wide-moat United Technologies, ticker UTX, which is currently trading below our fair value estimate.

At present, we believe the market is discounting long-term potential in two of United Technologies’ strongest businesses, Otis Elevators and Pratt & Whitney engines. Otis has an impressive installed base of 2.5 million elevators and escalators worldwide, with over 75% of them serviced under highly profitable, long-term maintenance contracts. However, competition in China, which is the world’s largest elevator market, has pressured Otis’ market share in the region, a trend that we believe has weighed heavily on United Technologies’ stock price. Over the long run, we believe demand dynamics in China will stabilize, and additional R&D investment will allow Otis to compete more efficiently in China by delivering next-generation products at lower cost.

In addition, Pratt & Whitney is on the verge of rolling out its newest engine, the Geared Turbofan, which is dual-sourced on the Airbus A320neo and sole-sourced on regional jet platforms manufactured by Bombardier, Embraer, and Mitsubishi. While the market is overly focused on the high cost of getting a new engine program up and running, we’re anticipating decades of lucrative aftermarket revenues to boost Pratt’s earnings longer-term. For these reasons, we believe investors should keep United Technologies on their radars.

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