United Technologies Corporation (NYSE:UTX): Are Forecast Margins sustainable?

With analysts projecting United Technologies Corporation (NYSE:UTX) to produce robust earnings growth of 23.18% in the coming 12 months, let's stop and evaluate this positive outlook. Those invested in the stock should contemplate the factors that are causing this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, I will try to evaluate United Technologies's margin behaviour so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.

Check out our latest analysis for United Technologies

Understanding UTX's earnings with profit margin

At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating UTX's profit margin.

United Technologies's margin has contracted in the past five years, with a positive 0.41% average growth in revenue and decline in net income of -0.35% on average, indicating that that a smaller percentage of revenue is being converted in to net income despite the top line growth. UTX's most recent margin of 7.61% appears to follow this trend, which suggests that the decrease in earnings has arisen due to difficulties in managiong costs as opposed to a lack of top line revenue.

What can we tell from future expectations?

It is expected that margins will transition into expansion, with an expectation of 5.43% in annual revenue growth and a forecasted 12.01% in annual net income growth. This suggests the previous earnings stability is expected to transition in to stronger growth through enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. Nonetheless, those interested in the company should remember that a expanding margin can mean different things for different companies, thus more detailed research is essential.

Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For United Technologies in particular, profit margins moving forward are forecasted to expand along with the Aerospace & Defense industry margins, whilst at the same time, the forecasted ROE of United Technologies is greater than the industry at 18.04% and 11.94% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This suggests that analysts expect United Technologies's return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on United Technologies's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For UTX, I've compiled three important aspects you should further research:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is UTX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UTX is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of UTX? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.