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United Technologies' Breakup Should Unlock Value

Our sum-of-the-parts assessment surpasses our current fair value estimate.

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In the wake of completing the Rockwell Collins deal,  United Technologies (UTX) has announced plans to split itself into three companies: aerospace, Otis (elevators), and Carrier (building systems). Per management, the separation of Carrier and Otis should be completed sometime in 2020. The aerospace business will retain the United Technologies name and current chairman and CEO Greg Hayes will lead the company. Management didn't identify the executive teams for Carrier or Otis. Our discounted cash flow model generates a fair value of $144 per share for United Technologies, but using a sum-of-the-parts method, we arrive at $168 per share. We think there is potentially more upside for Carrier and Otis, given the significant amount of attention paid to and investment in the aerospace business over the past several years.

Using PitchBook's median 10-year enterprise value/EBIT multiples for United Technologies’ business unit peers and our projections for each unit's 2019 operating profit, we calculate an enterprise value of about $194 billion, which is nearly 50% above the current $131 billion enterprise value. Backing out debt, pensions, corporate costs, dissynergies, and other items, we arrive at a value of $168 per share. We believe United Technologies’ aerospace business has an enterprise value of $107 billion, which represents about 55% of our total enterprise value for the company. The Carrier business accounts for 27% of our sum-of-the-parts valuation ($52 billion enterprise value), and we put Otis’ enterprise value at roughly $36 billion based on peer multiples.

Chris Higgins does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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