UNITED TECHNOLOGIES LTD. $62 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) operates in two main fields.

Its aerospace businesses include Pratt & Whitney (aircraft engines), Sikorsky (helicopters) and Hamilton Sundstrand (aircraft electronics). These operations supply about 40% of the company’s revenue, and 45% of its profit.

It also supplies building equipment and services, which include Carrier (heating and air conditioning), Otis (elevators) and UTC Fire & Security (which provides sprinkler systems, intruder alarms and security services under the Chubb and Kidde banners).

Revenues grew from $27.9 billion in 2001 to $42.3 billion in 2005, partly due to acquisitions. Profits rose from $1.92 a share (total $1.9 billion) in 2001 to $3.05 a share ($3.2 billion) in 2005.

The company spent $1.37 billion (3.2% of revenue) on research in 2005, up 7.9% from $1.27 billion (3.5% of revenue) in 2004. That’s also equal to 43% of its income. Accounting rules force it to write off these outlays immediately, which hurt its earnings.

Research will pay off for years

However, this spending helps United Technologies maintain its competitive advantage.

For example, most of the extra spending in 2005 went to developing electronic equipment for Boeing’s new 787 Dreamliner passenger jet. Based on strong initial demand for the 787, this spending should pay off in steady sales to Boeing for years to come.

The company is also developing several new technologies that will help make new buildings more energy efficient. New air conditioning and refrigeration equipment that uses less power than older models also helps customers cut their energy bills.

Another area that holds great long-term promise is fuel cells that use hydrogen to generate electricity, with no harmful emissions.

Safe way to invest in fuel cells

United Technologies first started making fuel cells in the 1960s for the U.S. space program, but the technology is still years away from widespread use. However, United Technologies gives investors a low-risk way to profit from this emerging technology.

The troubled state of the global commercial airline industry adds to United Technologies’ risk. But many financially stressed carriers, particularly in emerging countries, will probably upgrade their fleets instead of buying new aircraft. United Technologies now gets about 40% of its total revenue from after-market parts and services.

The company is a major supplier of parts to the U.S. military, which offsets its exposure to airlines. High oil prices have also led to a surge in helicopter orders, as oil companies explore more remote areas.

Helps builders cut their risk

United Technologies has been profiting from the recent construction boom, particularly in overseas markets which now supply close to 70% of its building services revenue.

Its wide array of products and services lets builders deal with fewer suppliers, which speeds up construction. Many building owners prefer to let United Technologies maintain and upgrade both their elevators and heating systems, which generates long-term service revenues.

Thanks to the steady cash flows its businesses generate, United Technologies’ long-term debt is just 35% of stockholders’ equity. That gives it plenty of flexibility to make more acquisitions, or expand its current operations.

However, goodwill is high at 28% of assets. This increases the risk of a future writedown if its recent acquisitions run into trouble.

Buybacks to rise 25% in 2006

The company is aggressively buying back its stock, which helps offset the shares issued under stock option plans. It spent $1.2 billion on share repurchases in 2005, and should spend $1.5 billion this year.

United Technologies should earn $3.58 a share in 2006, and the stock trades at 17.3 times that estimate. It’s also attractive at 13.4 times its projected cash flow of $4.64 a share, and at 1.3 times its revenue of roughly $46 a share.

The company just raised its quarterly dividend 20.5%, from $0.22 a share to $0.265. The new annual rate of $1.06 yields 1.7%.

United Technologies is a buy for long-term gains.