Dow Industrial giant United Technologies (UTX) is enjoying a good year thanks to tailwinds in its aerospace businesses. But its future growth could owe as much to elevators as to aircraft parts.
United Technologies' Pratt & Whitney division is experiencing heightened demand for commercial spare engines, and its aerospace systems unit is seeing rising sales of commercial aerospace products. Both divisions are benefiting from acquisitions that are allowing for higher segment sales and operating profits.
However, its Otis (elevator) and UTC Climate, Controls, & Security segments could help power even more expansion in the future. Commercial construction activity usually picks up after residential housing improves. We saw just such a spike from 2006 to 2008, when Otis and Carrier (HVAC) each enjoyed strengthening performances.
Meanwhile, the U.S. housing market had started to deteriorate through that time period. Now, with construction metrics having risen significantly since early 2012 and the Architectural Billings Index -- a measure of overall demand for architects' services -- on the rise, the cycle seems to have started all over again, and suppliers to commercial builders ought to benefit.
United Technologies is certainly seeing the signs of this upturn, including a 22% jump in orders at Otis during the June quarter. Orders from China alone climbed 35%. All of this could mean better results in the near future at the company's elevator unit.
In the meantime, residential HVAC (heating, ventilation, and air conditioning) orders in the U.S. climbed 19% over the same time frame, offset partially by a 4% decline in Europe. This could signal that sales from the company's Carrier business are about to gain steam.
Elsewhere, orders for global fire and security offerings were up at a mid-single-digit percentage rate. Adding to all of this, the company's Transicold commercial refrigeration business saw a 5% order advance in the U.S., offset by weakness in Europe.
Barring more European weakness, subsiding pricing pressure should help United Technologies' commercial construction businesses boost margins and earnings. In early 2013, UTC also trimmed its workforce and cut costs at its facilities to try to keep its margins stable. Thanks to measures like these, UTC should see overall earnings growth.
Another company building its construction exposure
If the commercial/nonresidential construction market is on the verge of an upturn, United Technologies shouldn't be the only place you look for investments. Why not also consider Hubbell (HUB-B) Its business is nearly 100% tied to the nonresidential and residential construction markets through its electrical and power segments. Compare that to the 51% of United Technologies' 2012 business related to commercial or industrial uses.
Hubbell has gained a sales boost by acquiring other companies, including two electrical businesses purchased during the first half of this year. According to the company's earnings release, sales should rise in the 4% to 6% range this year.
Last quarter's earnings give a glimpse into what the various end markets the company serves look like. Hubbell is seeing improved demand for lighting products, while industrial demand has slumped a bit. Most notably, it is experiencing strength in the residential construction and commercial renovation markets.
This means that commercial construction growth is not a factor in Hubbell's earnings growth at this time. But it could soon be another catalyst helping to boost Hubbell's results, making this an even better stock.
United Technologies might grow along with rising commercial construction metrics. But if you want focused commercial building exposure and a solid earnings outlook, Hubbell could make an even better choice.
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- United Technologies