Every Thursday we bring you one of our best U.S. stock picks. You get our specific recommendation on the stocks we profile, with a full explanation of how we arrived at our opinion. You will read about stocks making moves you should know about, most often from coverage in our newsletter on U.S. investing, Wall Street Stock Forecaster.
United Technologies fell slightly in late November, after Louis Chenevert, its chief executive for the past six years, retired suddenly. However, new CEO Gregory Hayes (who is also a former vice-president) will likely continue Chenevert’s focus on the company’s main aerospace and construction divisions.
These businesses operate in cyclical markets, but their outlook is bright. Airlines are replacing their aging fleets, increasing demand for jet engines and other parts, while developing countries’ ongoing urbanization fuels building-product sales.
United Technologies also has another advantage many competitors can’t match: because of its many subsidiaries, it can offer construction clients an integrated package of building products, such as elevators, heating and fire-control systems.
UNITED TECHNOLOGIES CORP. (New York symbol UTX; 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.
In 2012, the company 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.
Revenue 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.
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.
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United’s higher spending is mainly because Pratt & Whitney is developing jet engines for new narrow-body planes, including Bombardier’s CSeries.
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.
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 7.1% 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.
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%.
United Technologies is a buy recommendation of our advisory on U.S. investing, Wall Street Stock Forecaster.
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