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Carrier Gets Tax Incentive to Retain Some Indiana Jobs

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Staying true to his election-campaign promise, President-elect Donald Trump was recently able to coax Carrier, one of the operating segments of diversified conglomerate United Technologies Corporation (UTX - Free Report) , to retain some of the jobs at its Indianapolis unit.

The win-win deal that critics allegedly referred to as ‘federal arm-twisting tactic’ is likely to act as an alarm bell for other companies who seek to outsource a sizable amount of their jobs to low-cost nations to improve their margins. Before analyzing the efficacy of such allegations, let us dig a little deep to find the trade-offs of the deal.

Tax Incentives

United Technologies has been grappling with various macroeconomic challenges and has been restructuring its operations to improve its profitability. Post third-quarter 2016 earnings, the company recorded an average return of 6.0% – almost in line with the Zacks categorized Diversified Operations industry, and looks poised for an uptrend with rising earnings estimates for the current year.

In order to retain the manufacturing units and the associated jobs within the state, Indiana had offered Carrier $1.7 million in grants and tax incentives from 2011 to 2013. Despite the tax inducements, Carrier decided to shift about 2,000 jobs to Mexico early this year to save approximately $65 million in operating costs.

As Donald Trump entered the fray for the U.S. Presidency, he vociferously condemned such job outsourcing in his campaigns and vowed to bring back those jobs to the American shores, if he got elected. In order to keep his words, he along with Vice President-elect and Indiana Governor, Mike Pence negotiated with Carrier and was able to retain about 1,100 jobs in the U.S. These included 300 jobs in research and headquarter positions and 800 manufacturing positions at its production unit. In exchange, United Technologies was awarded $7 million in tax incentives over 10 years – over four times the previous inducements.

Although Carrier got a better deal to impede the job outsourcing, a Wall Street Journal article reportedly claimed that it is still shifting about 600 jobs from the Indianapolis factory and 700 jobs from the nearby Huntington, IN plant to Mexico. Nevertheless, the deal offered some respite to Trump and was a face-saver for his claims of "putting America first."

The Critics

Critics allege that offering sops and incentives in the form of tax breaks are short-term solutions and are not likely to curb the job outsourcing unless some drastic changes are made to the prevailing laws. Furthermore, it would create a race for higher tax incentives by other states in the U.S. as they vie for a bigger pie in the job market. For instance, General Electric Company (GE - Free Report) relocated its corporate headquarters from Fairfield, CT to Boston, MA, to significantly reduce its tax burden. In order to entice as big a company as General Electric, Massachusetts offered up to $120 million in grants and other incentives and property tax savings of up to $25 million. (Read: Will GE's Boston Relocation Have Any Impact on Shares?)

Tax incentives might also give a perfect opportunity to companies to offset a significant part of their labor costs and, in turn, automate their operations to further reduce fixed costs. The U.S. has reportedly lost about 5 million manufacturing jobs since 2000, with Indiana alone losing 150,000 factory jobs. Indiana also lost around 7,000 manufacturing jobs last year. Critics pointed out that Trump would not be able to negotiate tax incentives for each and every company that seeks to relocate their jobs outside the country in his individual capacity, as it would relate to as meddling in business operations. They argue that companies mostly resort to job outsourcing to reduce operating costs, and tax incentives are often not enough to compensate the benefits of outsourcing.

Moving Forward

Business-friendly policies that aim for the holistic growth of companies in general and the economy in particular are the call of the hour. Whether Carrier has set the precedence for several such similar tax incentives for other companies in the near future at the cost of the public exchequer remains to be seen.

United Technologies currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the industry include Danaher Corp. (DHR - Free Report) and Hitachi, Ltd. (HTHIY - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danaher is currently trading at a forward P/E of 21.8x and has beaten estimates thrice in the trailing four quarters, the average positive earnings surprise being 6.1%.

Hitachi is currently trading at a forward P/E of 13.6x and has beaten estimates thrice in the trailing four quarters, the average positive earnings surprise being 103.5%.

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