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United Technologies Looks Attractive For Investors

August 08, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at United Technologies Corp. (UTX), a $95.34 billion market cap company, a multi-industry holding company that conducts business through five segments: Otis; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems; and Sikorsky.

Strong cash

The company generates strong cash due to its profitable businesses. With that healthy cash, it can invest in longer-term platforms.

Pratt & Whitney was a success, the leading supplier of aircraft engines. In order to compete with General Electric (GE) and Rolls-Royce, Pratt & Whitney spent more than ten years developing its geared turbofan technology. Pratt was able to be the only supplier on Bombardier's CSeries aircraft and an alternative on Airbus' re-engined A320neo.

Emerging markets

With an exposure of almost 20%, the emerging markets are key regions because they allow United to remain profitable even during difficult economic times in developed markets. The firm is a dominant player in the Chinese elevator market, a country that has one-third of the world's elevators and is expected to increase much faster than U.S. domestic markets.

The Carrier division

The company focuses on raising operating margins so management has made good efforts to demonstrate its commitment.

The joint venture between Carrier's distribution arm and Watsco showed good synergies, allowing Carrier to focus on technology, which is the true core of the firm. Further, Watsco's expertise in distribution makes it possible to reach new markets and more customers.

More or less 20% of United’s revenue comes from government spending. So cash flows are very sensitive to what happens with the Defense Sector. For example, the company is developing three programs: the Joint Strike Fighter, Sikorsky's Black Hawk program, and the refueling tanker program with Boeing.

Payment history

Since 1936, United has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Although the current dividend yield is not too high, currently at 2.21%, it can improve in the future allowing higher shareholder´s returns.

Revenues, margins and profitability

Looking at profitability, revenue growth by 2.2% led earnings per share increase in the most recent quarter compared to the same quarter a year ago by 8.2% ($1.7vs $1.82). During the past fiscal year, it increased its bottom line by earning $6.22 versus $5.35 in the prior year. This year, Wall Street expects an improvement in earnings ($6.85 versus $6.22).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

UTX

United Tech

17.95

BA

Boeing

30.82

LLL

L-3 Communications Holdings Inc

12.92

LMT

Lockheed Martin Corp

60.61

 

Industry Median

7.31

The company has a current ROE of 17.95% which is higher than the one exhibit by L-3 Communications Holdings Inc (LLL) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher levels of ROE, The Boeing Company (BA) could be the option. Lockheed Martin Corp (LMT) even has a much higher ratio. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1407383035709.png

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 16.2x, trading at a discount compared to an average of 24.3x for the industry. To use another metric, its price-to-book ratio of 2.8x indicates a premium versus the industry average of 1.73x while the price-to-sales ratio of 1.5x is above the industry average of 1.06x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $23.460, which represents a 18.6% compound annual growth rate (CAGR).

1407383009033.png

Final comment

The global economy is showing signs of improvement, and this should help the industrial sector. A weak global economic environment in developed economies plus a moderate growth in China and India, makes emerging markets as key drivers for future growth.

The management focuses on raising margin, and strategies are implemented in that sense. Further, key initiatives such as improving efficiency and technologies are efforts that soon will be rewarded.

Moreover, the stock's relative valuation and the return on equity that exceeds the industryaverage make me feel bullish on this stock.

Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Burbank (Trades, Portfolio), Bill Frels (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Scott Black (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

Rating: 5.0/5 (1 vote)

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Comments

hvt2107
Hvt2107 - 3 months ago

It's nice to see the lines of PPS came down to match the slope of its earnings. I enjoyed reading your article very much. Have a good weekend!

ovenerio
Ovenerio premium member - 3 months ago

Thank you very much. Have a nice weekend too!

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