April 23, 2013 8:30 pm

US industrials: internally diverse

The unambiguous verdict from United Technologies is ambiguity

Consider United Technologies a tiebreaker on first-quarter earnings for diversified industrials companies. Last Thursday General Electric and Honeywell reported contrasting results. GE disappointed with greater than expected weakness from its power and water segment (revenue down 26 per cent) and offered pessimism about the remainder of the year. Honeywell was able to beat earnings expectations with strength across its segments, and slightly increased its view for the full year.

The unambiguous verdict from UTC: ambiguity. Earnings per share were up 16 per cent as benefits from the $16.5bn acquisition of Goodrich started to flow through the income statement. But revenues came in light, as organic sales declined 2 per cent for the quarter (organic revenue was down 6 per cent at GE and 1 per cent at Honeywell).

Diversified industrials are tricky to evaluate. They are internally diverse (UTC sells both lifts and jet engines) and each does things the others do not (Honeywell alone sells auto parts, for example). So what to watch as the year unfolds?

Europe exposure will continue to drag (GE blamed Europe for poor results in power and water). China, even with “only” 7.5 per cent GDP growth, was a strong market for all three. Aerospace is a good place to be but on the commercial not the military side. The US airlines all project profitability this year and the global jet expansion cycle continues. In military aviation the US government sequestration hovers. UTC said sequestration could take as much as $0.10 out of earnings per share (tolerable, when EPS is expected to be around $6.00). Honeywell reduced its top line by 1 percentage point on the same basis. Execution has its own role to play, of course. And as the companies’ share performance in recent years suggests, Honeywell has the edge there.

Email the Lex team in confidence at lex@ft.com

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