The fundamentals vs. the fear-a-mentals. That's the battle going on and today the fundamentals trashed the fear-a-mentals. The score wasn't even close.
When I speak of fundamentals I am speaking of the likes of United Technologies (UTX) , which put out a fantastic set of numbers despite so much of bad news. Can you imagine? You've got Boeing (BA) as a big customer with a plane that doesn't fly that costs United Technologies $100 million a month while it's mothballed. You have China as the most important market for its subsidiary Otis, the elevator company, a market that seems like it has vanished overnight because of the coronavirus. You have a defense budget that's not growing. You have a company that will do so much better under a hectored president who the Democrats would like to draw and quarter. You have a slowing world with little sign of any green shoots pretty much anywhere.
And what happens? The company puts up excellent numbers, despite the obvious landmines. Greg Hayes delivers a masterful quarter with no complaints about Boeing or China. His pending merger with Raytheon (RTN) soothes any worry about the defense budget. Other than his HVAC business, known as Carrier division, every single line up is up strongly.
Why does this matter? Because United Technologies checks off all the fear-a-mental boxes, something that so many believed was impossible as we go into the thick of earnings season. Hayes did it so well that he's laid out a primer of how to triumph over the big fear-a-mentals out there.
It's a remarkable accomplishment because the fear-a-mentals are so great I want to unpack them and double-click them, two terms I keep hearing on conference calls and, frankly, I am getting sick of them.
First, fear-a-mental?
What the coronavirus will do to air travel and hence the biggest division for United Technologies. It's the biggest fear-a-mental out there. How did Hayes answer the question about it? "We went back and too a look at 2003 and the impact of the SARS virus," he said on the call. "And as you'll recall air traffic slowed down significantly for about three months and really there was a six month impact overall in the aftermarket. I would say there are two major differences today. One is the airlines are a lot healthier than they were in '03. You were coming off 9/11 and airline bankruptcies and nobody had any money. The fact is air traffic remains pretty strong, but there will be a blip in Asia this quarter as a result of this."
A "blip"? Take that fear mongers.
He wasn't done.
"The second thing is the flu. It happens every year.... We went back and we're looking on the last full flu seasons we had -- 960,000 people were hospitalized with the flu, 80,000 people passed away. So as we think about this, you got to keep it in perspective. It's a big deal, obviously, until they get it contained. But the Chinese government, I think, is doing a much better job today in terms of being proactive in containing this."
I know many of you who are vested in the fear-a-mentals will refuse to acknowledge the perspective Hayes offers, but I found it to grounded not in hope, but in reason.
The second fear-a-mental? The tremendous fallout from Boeing.
How can it not hurt one of its biggest suppliers, which gives it not only engines, but all sorts of parts inside a plane? Because United Technologies has designed a popular engine called the Geared Turbofan that's in such strong demand from so many companies that the Boeing issue, which he thinks can be resolved in three months, won't dent his numbers by much.
Hayes says, for example, that United Technologies has got 10,000 GTF engines in backlog.
That's incredible.
And, he adds, "We've got about a 40% share of the A320, higher share in the A321 than on the A319 and 320."
Suffice it to say, Airbus will take anything United Technologies will offer.
Plus, it is merging with Raytheon and then creating an aerospace and defense powerhouse while spinning off the elevator and the climate control businesses. In other words, Hayes wasn't sitting around beholden to any one country or one supplier. Diversification is the only free lunch.
Oh, and about the president and the defense budget? Is a hobbled president on the mind of Greg Hayes? Not if you go through the quarter or talk to the man. In fact, this is really important, the fear-a-mentals often include what will happen to Washington if the president is found guilty. Isn't that what this whole John Bolton kerfuffle is about? I choose the word kerfuffle deliberately because even though United Technologies is one of the largest suppliers to the federal government, no one's worried that pro-defense-budget Trump is even remotely in trouble in the Senate. To business people and to big investors, it's all a big sideshow, because they trust the Republicans to stay in line, witnesses called or not.
The fear-a-mentalists don't want to believe that. They don't want to believe any of this. They want me to wear a surgical mask while I dab my eye-lids with Clorox wipes and stop shaking hands with my guests and instead, fist pump them, praying I will get a chance to pull out my Purell bottle without you noticing.
No can do.
Can Hayes' optimism withstand a sudden increase in the body count? Can it handle the death of someone, an American perhaps, who didn't visit China?
Not sure.
But his soothing commonsense words sure helped to reverse the prevailing trend and gave other execs a road map to defeat the fear-a-mentalists.
