Is United Technologies Just Being Modest?

Is United Technologies (UTX) under promising so it can over deliver?

Sterne Agee & Leach analysts Peter S. Arment and Josh Sullivan believe so, even if the stock's recent performance suggests Wall Street isn't all that sure.

In a research note published today after the maker of Otis elevators, Pratt & Whitney aircraft engines and Carrier air-conditioning systems offered investors muted financial targets 2014, the Sterne duo predicted respectable top-line growth and impressive cash generation that will "effectively put a valuation floor in despite all the moving parts."

The Wall Street Journal reports:

[United Technologies] sees full-year sales for the new year just above the expected level for 2013, as organic sales growth is expected to be slightly offset by net divestitures. The company has recently renewed its focus on aerospace and commercial businesses, in the process shedding units that don’t fall into those segments, such as a wind-turbine operation and a rocket-engine business. Recent results have also been bolstered by the acquisition of aircraft-component maker Goodrich Corp.  For the new year, United Technologies forecast profit between $6.55 to $6.85 a share on about $64 billion in sales. Analysts surveyed by Thomson Reuters expected a per-share profit of $6.84 on $66.3 billion in sales.

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Analysts at William Blair downgraded United Technologies to from Outperform to Market Perform.

But Sterne's Arment and Sullivan wrote that the company has a track record of under promising and over delivering. The analysts see United Technologies earning $6.80 a share in 2014 on revenue of $65.8 billion.

The duo expect free cash flow of almost $6 billion. They write:

With budget negotiations in Washington ongoing and uneven global growth, there are swing factors in the EPS guidance from the midpoint to upper-end. These factors include recovery within the Eurozone and F/X impacts associated with the Euro (guided to $1.33), a sequestration budget deal, U.S. economic growth already looking stronger than expected, and tax credit extenders. Overall, UTX sees lots of positives in 2014 including high growth region mega trend fundamentals still working, a U.S. economic recovery acceleration (residential construction), and commercial aerospace aftermarket continuing the 2013 momentum. UTX expects to deliver 8 of the under preforming Canadian CMHP aircraft in 2014. Net, net management is keen to build a track record of under promising and over delivering as it did in 2013…

United Technologies fell 0.5% to $107.55 during afternoon market action.