KONE Makes Its Case For Digital Leadership Amid Shaky Markets

It’s arguably too early to call a winner in the battles among elevator and escalator manufacturers to establish the top digital platform, but KONE (Kone) (OTCPK:KNYJY) (KNEBV.HE) has made it abundantly clear that is where they intend to be. Not only are digital capabilities increasingly important on the hardware side, they are driving meaningful changes on the service side, and as companies like Kone, Schindler (OTC:SHNDY) and Otis (OTIS) upgrade their integrated digital service offerings, I believe it will be harder and harder for independent service providers to hold their place in the market.

Kone has upgraded its guidance for 2020 on stronger performance in China, but also seemed to make a point of tamping down expectations for 2021 at its recent Capital Markets Day. Given efforts by China to tamp down property development and a shakier global outlook for certain commercial building categories, that seems prudent. Although I continue to be impressed with Kone’s execution, and I like its leverage to both digitalization in this sector and its leading position in China, the valuation remains difficult to reconcile with financial realities.

 

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KONE Makes Its Case For Digital Leadership Amid Shaky Markets

Kone Already Getting Ample Reward For Its Quality

Quality deserves a premium, but the market seems to be going overboard with Kone (OTCPK:KNYJY) (KNEBV.HE) (also spelled “KONE”), as this Finnish elevator and escalator company is indeed a high-quality company, but one that seems unlikely to grow enough to justify the valuation. Future service growth in China is a valid driver, as is equipment growth in India and other markets, and I don’t dismiss the possibility of a value-building mega-merger, but the share price already seems to contemplate nearly double-digit free cash flow growth from a company serving a market likely to grow in the low-to-mid single digits.

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Kone Already Getting Ample Reward For Its Quality

Seeking Alpha: With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?

Like the roads around most major cities, the construction of a large industrial conglomerate is never finished. United Technologies (NYSE:UTX) is now strongly leveraged to the expected growth in commercial aerospace over the next decade, but the Building and Industrial Systems segment has suffered in comparison. Like most industrial conglomerates, United Technologies doesn't look like a tremendous bargain at today's levels, but I wouldn't underestimate the potential of a value-bidding deal in the next 12 to 18 months.

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With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?

Investopedia: United Technologies Still Has Plenty of Runway

Not unlike Honeywell (NYSE:HON) and General Electric (NYSE:GE), United Technologies (NYSE:UTX) has built its business to take advantage of emerging growth cycles in commercial aviation, urbanization, and energy efficiency. Weak construction activity and share losses have limited the growth at Otis, Carrier, and Fire & Security, but the company's aviation business seems to doing relatively well and I believe there's further upside in all of these businesses. My question with UTX, though, is how much margin and cash flow leverage is waiting to emerge, as these shares seem fairly rich without some significant improvements along those lines.

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Seeking Alpha: UTX Looks Like A Bargain, But Share Loss Is A Worry

One of the reasons that conglomerates often used to carry discounts to pure-plays was the fear/belief that management teams struggled to keep a careful over all of the moving parts of the businesses in the stable. In the case of United Technologies (UTX) I can see the point. While UTC looks to be in excellent shape to benefit from the ongoing commercial aviation upswing, I do worry a bit about businesses like Otis and Climate Control.

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UTX Looks Like A Bargain, But Share Loss Is A Worry

Investopedia: United Technologies Finds Some Turbulence

High expectations are great for a stock when the company delivers and shareholders see nice gains in their portfolio. The trouble with high expectations (and high valuations) is that the market is quick to punish what would otherwise be a solid performance. That would seem to be the biggest risk for United Technologies (NYSE:UTX) these days, as the company continues to sport both solid performance and a healthy valuation. 

The Quarter That Was  
Though there were some hiccups, United Technologies reported an all-around solid quarter (and one where revenue exceeded expectations). Revenue rose more than 9% as reported, with 6% organic growth. Top-line growth was led by the Otis business, while Hamilton Sunstrand and Carrier were close behind. Pratt & Whitney and Sikorsky were the laggards this quarter, but both still posted better than 5% revenue growth. 



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United Technologies Finds Some Turbulence (UTX, BA, GE, GR, SI)