UNITED TECHNOLOGIES CORP. $51 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 942 million; Market cap: $48 billion; Price-to-sales ratio: 0.9; WSSF Rating: Above Average) has six main businesses: Carrier makes heating and air-conditioning equipment (25% of 2008 revenue, 17% of profit); Otis makes and services elevators (22%, 32%); Pratt & Whitney makes aircraft engines (22%, 27%); Hamilton Sundstrand makes electronic controls for aircraft (11%, 13%); UTC Fire & Security sells burglar alarms and fire-protection services (11%, 6%); and Sikorsky makes helicopters (9%, 5%). The U.S. government is United Technologies’ biggest customer, and accounts for about 13% of its yearly revenue.

We feel that United Technologies’ diversification is one of its major strengths. All of its businesses are leaders in their industries.

Plus, the company sells products to both original-equipment manufacturers and aftermarket customers. That cuts its risk. For example, when demand for new planes is weak, airlines will probably buy more replacement parts instead of new aircraft. When the economy improves, aircraft makers will order more new engines and electronics. This will offset lower sales of spare parts.

United Technologies is also turning its building-related businesses into a more cohesive unit. This way, it can offer building owners bundles of products and services that suit their specific needs. This approach builds customer loyalty, since these packages help United Technologies’ customers cut their costs.

United Technologies’ revenue rose 56.7%, from $37.4 billion in 2004 to $58.7 billion in 2008. Earnings rose 68.2%, from $2.8 billion in 2004 to $4.7 billion. The company is an aggressive buyer of its own shares. As a result, earnings per share rose 79.5%, from $2.73 in 2004 to $4.90 in 2008.

Aggressive strategy has paid off

Acquisitions play a big role in United Technologies’ long-term strategy. This is riskier than focusing on internal growth. However, United Technologies has a strong record of successfully integrating new operations. This cuts the risk of a big writedown, despite the fact that the company’s $15.2 billion of goodwill is a high 28% of its assets.

In 2008, United Technologies spent $1.4 billion buying new businesses, mainly smaller companies that complement its current operations. Among other advantages, these purchases have given it a broader geographic presence: overseas markets account for just over 50% of its total revenue.

United Technologies has earmarked $2 billion for further acquisitions this year. The recession continues to hurt aerospace manufacturers, and the company feels it can pick up some bargains. It’s also interested in expanding its fire and security operations.

The company has also been raising its research spending. It spent $1.8 billion (or 3.0% of revenue) on research in 2008, up 5.5% from $1.7 billion (or 3.1% of revenue) in 2007. United Technologies has to write off these expenses, so it looks less profitable than it really is.

Most of this spending went to new aerospace products. For example, Pratt & Whitney is working on a new fuel-efficient jet engine. Demand should be strong, as airlines look for ways to cut fuel costs and emissions. Hamilton Sundstrand is also working on new electronic systems for Boeing’s upcoming 787 Dreamliner plane.

Restructuring aims to save $1 billion

Developing advanced products puts United Technologies in a strong position to increase its earnings when the recession ends. Even so, the company plans to cut 8% of its workforce over the next two years because of weakness in the aerospace and construction industries.

The resulting severance payments and other costs will lower United Technologies’ 2009 earnings by $750 million. This figure includes $600 million for the latest cuts, plus $150 million in expenses related to a similar job-cutting plan the company began last year. But despite their costs, these moves should lower United Technologies’ expenses by $1 billion a year.

These savings will help United Technologies deal with its $5-billion pension fund deficit. Because of last year’s sharp drop in stock prices, the company anticipates that its 2009 pension costs will rise by $225 million.

United Technologies’ strong balance sheet will also help it weather the recession. Its $9.3-billion long-term debt is 20% of its market cap. The company holds cash of $3.3 billion, or $3.47 a share.

Savings will kick in next year

United Technologies’ 2009 earnings will likely fall to $4.10 a share, excluding restructuring expenses, and the stock trades at just 12.4 times that estimate. In 2010, earnings should rebound to $4.45 a share, as the company sees more of the benefits from its restructuring plan. That gives it a p/e ratio of 11.5. Earnings should also rise at the Otis and Carrier divisions on a major infrastructure-spending plan in China.

The company has a long history of raising its dividend every year, and it will probably do so this year, as well. The current annual rate of $1.54 yields 3.0%.

United Technologies is a buy.