Shares of United Technologies Corp. (UTX) fell on Tuesday, Nov. 27, after the industrial conglomerate announced plans to separate into three companies.
The stock slipped 4.2% to $122.66.
Under the plan, United Technologies would create an aerospace company comprising Collins Aerospace Systems and Pratt & Whitney, a company housing its Otis Elevators unit, and Carrier, a company devoted to its building systems, including heating and cooling equipment.
United Technologies had come under pressure to break up earlier this year from insurgent investor Bill Ackman.
"Our decision to separate United Technologies is a pivotal moment in our history and will best position each independent company to drive sustained growth, lead its industry in innovation and customer focus, and maximize value creation," said United Technologies Chairman and CEO Gregory Hayes.
The separation is scheduled to be completed in 2020. Hayes will oversee the transition and will continue to serve as United Technologies chairman and CEO following the separation.
The announcement came after United Technologies late last week received approval from Chinese authorities for its Rockwell Collins acquisition, which followed months of antitrust review.
United Technologies updated its 2018 outlook to include the Rockwell Collins purchase, and now expects sales of $64.5 billion to $65 billion, which is up from a range of $64 billion and $64.5 billion. Adjusted earnings per share will now include approximately 10 cents from the acquisition, thereby lowering the guidance to $7.10 a share to $7.20 a share. Free cash flow outlook was trimmed to $4.25 billion to $4.5 billion, down from $4.5 billion to $5 billion.
For 2019, the company expects the acquisition to be 15 cents to 20 cents accretive to adjusted EPS. United Technologies also anticipates $500 to $750 million of accretion to free cash flow in 2019 from Rockwell Collins.
"The [Rockwell Collins] acquisition provides flexibility allowing for cash flexibility with the exception of 2018 to support a break-up," said Jefferies analyst Sheila Kahyaoglu. "Given an expected 2020 closing for the break-up, we view 2019 as a transition year."
While United Technologies could be under pressure over the next 18 to 24 months as it works through the separation, "longer term, the break-up could create a more focused enterprise, particularly for Aerospace which is essentially four public companies rolled into a single segment," Kahyaoglu wrote in a Nov. 27 research note.
Jefferies rates United Technologies at "buy" with a $148 price target.
TheStreet's Jim Cramer said the split "could be a major boon" for shareholders.
"I think United Technologies' stock has come down so much that it's worth starting to invest here, because the share price reflects a lot of negativity and not much chance of anything going right, and, of course, you've got a really positive catalyst," Cramer said on Mad Money on CNBC. "That said, there are some real headwinds here and you need to take them into consideration before you pull the trigger, and I certainly would urge you not to buy all at one price."