Shares of United Technologies were rising slightly on Monday as Credit Suisse thinks profit margin and earnings momentum are close to a trough, following several years of heavy investment spending.
"Investors will likely reward a looming earnings recovery in 2018 with multiple expansion, given how much valuations elsewhere in the [Electrical Equipment/ Multi-Industry] sector have run up this year," the Credit Suisse analyst team in a research note.
The firm upgraded its rating on the shares to Outperform from Neutral, and increased its price target by $17 to $125.
Analysts at Credit Suisse believe the headwinds in Aerospace that had been weighing on the company's financials will start to subside in 2018 and should re-accelerate earnings growth.
"UTX has outstanding global franchises, which enjoy a limited degree of cyclicality, but these attributes are masked at the present by a multi-year heavy investment in the Aerospace business in particular, which are a considerable drag on earnings," the analysts said. They also noted that Aerospace Systems and its Pratt & Whitney businesses, which combine for 50% of United Technologies net sales, are expected to be below their recent peaks by 180 basis points and 680 basis points, respectively.
However, once these headwinds abate, the analyst team is forecasting earnings per share compound annual growth rate of approximately 9% between 2018 and 2020.
Furthermore, despite margins for its Otis business expected to be 580 basis points below its peak, the Credit Suisse analysts believe pressure in both China and Europe "are unlikely to intensify."
As for the company's UTC Climate Controls & Security business segment, which includes Carrier, it should see a better demand backdrop in 2017, after order were weak this year. With higher demand, sale growth will accelerate in the second half of 2017, the analysts said.
(President-elect Donald Trump recently brokered a deal to keep more than 1,000 jobs at Carrier's Indianapolis plant in exchange for about $7 million in Indiana state incentives.)
"The stock has lagged this year and in 2015, but we believe consensus expectations are now low and for the first time in several years, we see little downside to Street EPS estimates," they wrote. Credit Suisse is modeling 2017 EPS at $6.60 and 2018 EPS at $7.18.
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