“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, July 16, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – United Technologies Corporation (NYSE:UTX) Calls

Monday, July 16, 2018

** OPTION TRADE: Buy the UTX AUG 17 2018 130.000 CALL at approximately $2.70 TO $2.80. Place a pre-determined sell at $5.40.

Also include a protective stop loss of $1.10.

Defense contractor, United Technologies Corporation (NYSE:UTX) has had quite a few ups and downs over the years; but it seems that leading hedge fund managers Dan Loeb and Bill Ackman don’t have a worry in regard to this fact.

United Technologies stock offers compelling value due to several reasons…..

  • When compared to UTX’s industrial conglomerate peers, it's clear the stock trades at discount on an EV-to-EBITDA -- enterprise value (market cap plus net debt) to earnings before interest, tax, depreciation and amortization -- basis. (EV-to-EBITDA is a very commonly used measure that helps compare companies with different debt loads.)
  • One benefit here is that United Technologies isn't facing cash flow issues or structural decline in its core segment.
  • United Technologies is positioning itself for long-term growth, but three of its four segments are suffering near-term headwinds as a consequence. Otis has been more price-competitive in order to win market share in the elevator equipment market in China, in turn generating more profitable long-term services revenue growth.
  • Meanwhile, Pratt & Whitney is ramping up production of its geared turbofan engine with a view to maximizing long-term aftermarket and service revenues, while UTAS' commercial OE sales have been weak as the company transitions from selling equipment on legacy aircraft toward newer aircraft from Boeing and Airbus.
  • All of these things are holding back near-term earnings, but analysts are seeing EPS growth moving from zero in 2017 to single digits in 2018, and then double digits in 2019.

And, there's also some significant upside from a possible breakup of the company. Hedge fund managers Loeb and Ackman grabbed the headlines with calls to separate the company into three different parts -- CCS, Otis, and an aerospace company comprising UTAS, Pratt & Whitney, and the soon to be acquired Rockwell Collins.

Other Factors

United Technologies rose from a September low to a top in January. It pulled back to the 100 day SMA and bounced, continuing higher to retest the top. It dropped again though and confirmed a double top as it touched the 200 day SMA at the end of March.

After a short consolidation it fell further, finding support at the November low. It drove higher fast from there to a high over the 100 day SMA. Since then it has consolidated until pushing to a higher high Friday.

The RSI is pushing up in the bullish zone with the MACD crossed up and rising.

Looking ahead…..

United Technologies Corporation is expected to report earnings on July 24, 2018 before market open. The report will be for the fiscal Quarter ending Jun 2018. The consensus EPS forecast for the quarter is for $1.86. The reported EPS for the same quarter last year was $1.85.

Analysts expect that United Technologies will report full-year earnings of $7.13 per share for the current fiscal year, with EPS estimates ranging from $7.10 to $7.20. For the next year, analysts anticipate that the firm will post earnings of $7.78 per share, with EPS estimates ranging from $7.50 to $8.00.

Analysts and Hedge Funds Opinions

Morgan Stanley's Rajeev Lalwani resumed coverage of the shares with an Overweight rating and $160 price target on Friday, writing that he's encouraged by the potential for company restructuring and accretion from M&A.

Lalwani believes that the shares look more attractive as the possibility of a potential restructuring has increased in recent weeks, given an announced portfolio review and activist involvement, which could lead to United Technologies being split. He thinks the "largest value opportunity stands out at its Aerospace segments, including the Geared Turbofan (GTF) engine program, thus pushing the market to potentially consider its worth outside of a conglomerate."

Moreover, he's positive on the Rockwell Collins acquisition, which he thinks will drive earnings per share above consensus: His estimates are 10% above the Street for 2019 and 2020, given deal accretion and capital returns.

Elsewhere, Wells Fargo's Sam Pearlstein reiterated an Outperform rating and $150 price target on United Technologies, citing the close of the Rockwell Collins purchase, expected this quarter or next.

He sees Rockwell Collins adding about 20 cents to his $7.60 EPS estimate in 2019 and 35 cents to his $8.20 2020 EPS estimate. "We continue to think the sum of the parts is worth $150 or more per share and either the stock will begin to reflect the fundamentals or the expected strategic review likely leads to realizing that value."

As well, United Technologies was upgraded by Zacks Investment Research from a “hold” rating to a “buy” rating in a research note issued on Wednesday, June 13th. The brokerage currently has a $143.00 price objective on the conglomerate’s stock.

According to Zacks, “United Technologies serves various end-markets, which allows it to remain profitable even during tough economic times. The company issued a bullish guidance for 2018 on healthy demand trends and is likely to deliver sustainable earnings growth in future with the Rockwell merger. Also, the company’s continuous investment in innovative products through higher engineering spend, secure orders and delivers value to its customers. Meanwhile, United Technologies remains focused on four key priorities: flawless execution, innovation, structural cost reduction and disciplined capital allocation to fuel its growth engine. Also, the company outperformed the industry on an average in past one year. However, the company is susceptible to high operating risks from macroeconomic conditions. Fluctuations in foreign currency exchange rates also affect the company’s bottom-line growth.”

Several other equities analysts have recently commented on the company…..

  • Jefferies Financial Group set a $157.00 price target on United Technologies and gave the stock a “buy” rating in a research report on Tuesday.
  • Daiwa Capital Markets raised United Technologies from a “hold” rating to an “outperform” rating in a research report on Tuesday, May 8th.
  • Cowen reissued a “hold” rating and set a $141.00 price target on shares of United Technologies in a research report on Tuesday, April 24th.
  • Finally, Wolfe Research initiated coverage on United Technologies in a research report on Wednesday, June 27th. They set an “outperform” rating on the stock.

Seven research analysts have rated the stock with a hold rating and fourteen have issued a buy rating to the company. The stock currently has an average rating of “Buy” and an average target price of $141.69.


United Technologies Co. has a 12 month low of $109.10 and a 12 month high of $139.24. The stock has a market cap of $99.91 billion, a PE ratio of 19.48, a P/E/G ratio of 1.93 and a beta of 1.09. The company has a quick ratio of 0.96, a current ratio of 1.32 and a debt-to-equity ratio of 0.77.