UTX - United Technology - Company Profile
United Technologies Corporation provides technology products and services to building systems and aerospace industries worldwide. Its Otis segment is the world's leading manufacturer, installer and maintainer of elevators, escalators and moving walkways. The UTC Climate, Controls & Security segment is a leading provider of advanced commercial and technical solutions, for safer, smarter and sustainable buildings. The Pratt & Whitney segment supplies aircraft engines for commercial, military, business jet, and general aviation markets; and provides aftermarket maintenance, repair, and overhaul, as well as fleet management services. The UTC Aerospace Systems segment is one of the world's largest suppliers of advanced aerospace components and systems for commercial, military and space customers. UTX employs more than 200,000 workers and had sales of $56 billion in 2015.
In their Q2 earnings cycle they reported earnings of $1.82 that beat estimates for $1.68. Revenue of $14.9 billion beat estimates for $14.7 billion. Pratt & Whitney had 4% organic growth and the aerospace sector 2% growth. The commercial division saw orders from China decline -14% but still did well globally.
The company raised guidance for all of 2016 for revenues in the range of $57-$58 billion, up from the prior $56-$58 billion forecast. They raised earnings guidance by 15 cents to $6.45-$6.60 per share. In comparison competitor Honeywell cut full year guidance and GE maintained a flat outlook for 2016 and warned it could extend into 2017.
The CEO, Gregory Hayes, said orders for the new geared turbofan jet engine has 8,200 orders because "operators love the engine." The engine uses 16% less fuel, has 50% lower emissions and 75% less noise. "It cost us $10 billion to develop it but that is paying off now." They cost buyers roughly $12 million each and there are 8,200 backorders. Hayes said he does not see any significant impact from Brexit because most of their business is primarily long cycle orders. Items are ordered a year or two in advance and sometimes even longer. The company announced a $1.5 billion cost reduction program in late 2015 and they are well on the way to achieving that goal.
I am recommending the 2018 $110 call with UTX at $107.74. Unfortunately, it is expensive because it is close to the stock price and there is a lot of time before expiration. I do not like to buy that close to the stock price in a LEAP but I do not want to use the $115 call because a stock split causes weird option strikes. I prefer even numbers so a 2:1 split produces a common strike price post split. With 18 months to run and the stock just under $110 there could easily be a split before we exit this position.
We could sell a short put but the margin would be steep because of the high stock price. For instance, if we sold a 2018 $85 put for $3.90 to reduce our net debit in the position to $3.70 the margin would be $1,275 plus the premium received. If you have a lot of excess margin capability in your account then that is a drop in the bucket and the position is profitable over $113.70. If you are already leveraging all the margin in your account, then paying the full premium of $7.60 means you are profitable over $117.60. If the stock runs to $130 you would make roughly $400 more per contract if you sold the put.
Earnings Oct 25th and we will not exit.
Buy Jan 2018 $110 call, currently $7.60, no initial stop loss.
Sell short Jan 2018 $85 put, currently $3.90, no initial stop loss.
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