UNITED TECHNOLOGIES CORP. $110(New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 911.7 million; Market cap: $100.3 billion; Price-to-sales ratio: 1.6; Dividend yield: 2.1%; TSINetwork Rating: Above Average; www.utc.com) has five main divisions: Climate, Controls & Security (26% of 2013 revenue, 27% of earnings) makes heating and air conditioning equipment under the Carrier brand, as well as burglar alarms and fire-safety products; Pratt & Whitney (23%, 19%) manufactures aircraft engines; Aerospace Systems (21%, 21%) makes engine control systems and other parts for aircraft; Otis (20%, 27%) makes elevators; and Sikorsky (10%, 6%) makes helicopters.
The company’s revenue rose 10.0%, from $52.9 billion in 2009 to $58.2 billion in 2011.
In 2012, it bought North Carolina-based Goodrich Corp., which makes aircraft parts (including landing gear, wheels and brakes) and maintains and fixes planes. United Technologies paid $18.3 billion, including assuming $1.9 billion of Goodrich’s debt. However, it also sold some less important businesses, so its revenue fell 0.8%, to $57.7 billion, in 2012.
Revenue turned around and rose 8.5% in 2013, to $62.6 billion, thanks to a full year’s contribution from Goodrich. United Technologies expects revenue of $65.0 billion in 2014 and $68.0 billion in 2015.
New innovations will keep sales rising
Earnings jumped 30.0%, from $3.8 billion in 2009 to $5.0 billion in 2011. The company is an aggressive buyer of its own shares. As a result, earnings per share rose at a faster pace of 33.3%, from $4.12 to $5.49. Earnings fell slightly, to $5.35 a share (or a total of $4.8 billion), in 2012 but rebounded to $6.21 a share (or $5.7 billion) in 2013.
In the third quarter of 2014, United Technologies’ earnings jumped 31.0% from a year earlier, to $1.85 billion, or $2.04 a share, from $1.4 billion, or $1.55. Without unusual items, such as a gain on the sale of its interest in a joint venture, earnings per share rose 11.7%, to $1.82 from $1.63. Revenue increased 4.6%, to $16.2 billion from $15.5 billion.
United Technologies spent $677 million (or 4.2% of its revenue) on research in the latest quarter, up 7.5% from $630 million (or 4.1% ) a year earlier.
The higher spending is mainly because Pratt & Whitney is developing jet engines for new narrow-body planes, including Bombardier’s CSeries.
The company’s design includes a larger fan that spins about 30% more slowly than the fan in current engines, so the new models burn less fuel, make less noise and run at a lower temperature. United Technologies expects to begin delivering these engines in 2015.
United Technologies is also making its other products more efficient. For example, its Otis Gen2 elevators use a unique technology that captures waste heat from the elevator and uses it to generate electricity.
Building owners can then feed this power back into their energy grids to power other systems and cut their overall power bill.
Meanwhile, United Technologies is doing a good job of integrating Goodrich. It is also closing unneeded plants and cutting jobs. In all, the company expects these moves to cut its yearly expenses by around $1 billion when it completes them in 2015.
Debt down 17% in the past two years
The savings will help the company pay back the cash it borrowed to buy Goodrich. Since the end of 2012, United Technologies has cut its long-term debt by 17.3%, to $17.9 billion, or a moderate 18% of its market cap. The company also held cash of $5.0 billion, or $5.52 a share.
Due to the Goodrich acquisition and other purchases over the past few years, United Technologies’goodwill and other intangible assets now total $43.9 billion, or a high 44% of its market cap. However, these are all profitable businesses with strong potential, which cuts the risk of a large writedown.
The stock has gained 62% in the past five years. However, it is currently down 9.1% from its all-time high of $121 in April 2014.
The drop is partly because United Technologies gets about 60% of its revenue from customers outside of the U.S., and the higher U.S. dollar hurts the contribution of its overseas operations. As well, sales to military clients account for 19% of the company’s total revenue, so it’s vulnerable to possible cuts to defence spending.
Market share offsets currency risk
We feel United Technologies’ high market share, particularly in fast-growing emerging markets, offsets the risks posed by currency rates and potential defence cuts. Moreover, the stock trades at a reasonable 16.2 times the $6.80 a share that United Technologies will likely earn in 2014.
The company has paid a dividend every year since 1936 and has increased its payment every year since 1995. The current annual rate of $2.36 a share yields 2.1%
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