United Technologies: A Valuable Stock For 1H13

| About: United Technologies (UTX)

On Dec. 13, United Technologies Corp (UTC) (NYSE: UTX) provided initial EPS guidance for FY13 along with its dividend payout, share repurchase and other strategies for 2013. The company provided no significant update on the Canadian Maritime Helicopter Program (CMHP), apart from the fact that there will be no shipments of CMHP in 2012, but guided that the company is assuming delivery of 8 helicopters in 2013. I believe progress on CMHP would be a positive catalyst for the stock in 1H13.

After the announcement of sales, profit and EPS guidance for FY13, that was below buy-side expectations, the stock traded down by 0.49%, reaching $79.98 on Dec. 14. I believe that the stock should be bought on any weakness, as the CMHP program, along with sales growth and other factors, is going to be positive for the stock in 1H13. My target price for the stock is $90, that should be achieved by 1H13. The stock has already started picking up with an opening price of $82.22 on Dec. 19.

The factors that work in favor of the stock are listed below:

1. For 2013, the company guided mid single digit organic sales growth (3%-5%) at company level, with an expectation of outperforming the market growth in each of its five business segments. It expects sales of $64bn to $65bn (growth of 10%-12%) and earnings per share of $5.85 to $6.15 (growth of 10% - 16%).

2. The company expects mid single digit growth at Otis in both new equipment and service, driven by volume. The company has already made some progress in this direction with new equipment order up 15% YTD at Otis North America. With a new factory at China, Otis expects to regain 2011 level of market share in China.

3. It has guided to a mid single digit organic sales growth at Climate Controls & Security (CCS), driven by strong conversion. In CCS, Transicold orders are ticking up and it expects mid single digit growth in U.S. residential, Fire & Security products and global commercial HVAC.

4. Low single digit organic sales growth is expected at Pratt & Whitney. Earnings at Pratt will be driven by higher volume and lower E&D spend that will be partially offset by decline in military business.

5. UTC aerospace sales are expected to be around $13.5bn to $14bn (growth of approximately 65% yoy), driven by growth in commercial aerospace and synergies from the acquisition of Goodrich.

6. At Sikorsky, sales growth is guided to be in the low single digits with earnings to be down in FY13 by about $250-300mn due to a $120mn headwind from CMHP and over $100mn from the multi-year 8 reset. However, I believe that any clarity on CMHP would be positive for the stock.

Therefore, the company is targeting earnings growth in 4 of its 5 segments.

7. The company has guided to return 70% of the cash to shareholders with a dividend payout ratio of 35%. In early 2013, the company will return to buy back placeholders of $1bn. We can expect more buyback once the cash from divestments is accumulated. The company does not expect any big M&As in 1H13. However, some investments in Otis are expected once Fire & Security (F&S) divestments are largely finished by 2Q13.

I believe the stock has upside potential that can be realized by 1H13 when there is more clarity on the progress of CMHP program and more cash flowing in from cost savings and recently announced divestments. These two factors, along with the share buyback program and a decent organic sales growth will drive the stock price upward in 1H13. My target price for the stock is $90 that I expect it to achieve by the end of 1H13.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.