United Technologies Corporation (UTX) and Siemens AG (SI) are two industrial companies with steady revenue growth, strong cash flow, and lower-than-industry average P/Es and Forward P/Es. Both stocks had received positive upgrades from analysts recently and will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
United Technologies Corporation
UTX was down 0.55% and closed at $92.77 on March 18, 2013. UTX had been trading in the range of $70.71-$93.58 in the past 52 weeks. UTX has a market cap of $85.04B and a beta of 1.06.
On March 18, 2013, Citi upgraded UTX from neutral to buy. FBR Capital reiterated a market perform rating and increased the target price from $88 to $95 for UTX on the same day. Analysts currently have a mean target price of $98.22 and a median target price of $100.00 for UTX, suggesting 5.87%-7.79% upside potential. Analysts are estimating an EPS of $1.29 with revenue of $14.97B for the current ending in March, 2013. For 2013, analysts are projecting an EPS of $6.09 with revenue of $65.15B, which is 12.90% higher than 2012.
UTX has a strong buyback plan of $5.4B, where the company will repurchase as many as 60 million shares for a total of about $1 billion for 2013, which is in-line with the previous projection. UTX is set to benefit from the improving economics in China and UTX expects Asian sales to increase about 7-8 percent in the next decade as construction of skyscrapers in China boosts demand for elevators and air conditioners.
On March 18, 2013, UTX announced it has completed the sale of the former Goodrich Corporation pump and engine control systems business to Triumph Group, Inc. (TGI). The sale was one of the divestitures required by regulatory authorities as a condition of UTX's acquisition of Goodrich Corporation.
Fundamentally, there are a few positive factors for UTX:
- Higher revenue growth (3 year average) of 3.2 (vs. the industry average of 2.2)
- Higher operating margin of 13.3% and net margin of 8.9% (vs. the industry averages of 9.6% and 6.1%)
- Lower P/E and P/B of 17.4 and 3.3 (vs. the industry averages of 18.3 and 3.5)
- Lower Forward P/E of 12.9 (vs. the S&P 500's average of 13.9)
- UTX generates a strong operating cash flow of $6.65B with a levered free cash flow of $2.68B
- UTX has 5 year average dividend yield of 2.50% and currently offers a forward annual dividend yield of 2.30%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend, but the MACD difference continues to decline. The momentum indicator, RSI (14), is declining but still indicating a strong buying momentum at 62.97. UTX is currently trading above its 50-day MA of $88.92 and 200-day MA of $79.74, as seen from the chart below.
How to Invest
UTX will continue to benefit with improving global economy. UTX remains a good long-term holding for cash flow investors. However, with the recent run-up and weakening short-term technical trends, bullish investors might want to setup the long-term position after pull back. A safer entry point will be $88/$88.50. Investors can also review the following ETFs to gain exposure to UTX:
- Industrial Select Sector SPDR (XLI), 5.47% weighting
- Dow Jones Industrial Average ETF (DIA), 4.94% weighting
- SPDR S&P Aerospace & Defense ETF (XAR) 4.71% weighting
SI was down 0.45% and closed at $108.43 on March 18, 2013. SI had been trading in the range of $77.88-$112.73 in the past 52 weeks. SI has a market cap of $91.38B with a beta of 1.58.
On Mach 18, 2013, BofA/Merrill Lynch upgraded SI from neutral to buy. The target price for SI is $111.67, suggesting 2.99% upside potential. Analysts, on average, are estimating an EPS of $1.93 with revenue of $26.21B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $7.46 and revenue of $104.51B, which is 3% higher than 2012.
Siemens will continue to benefit from the increasing investment into LTE networks globally, including China Mobile's huge CapEx into TD-LTE network, through Nokia Siemens Networks, a joint venture between Nokia (NOK) of Finland, 50.1% control, and Siemens (SI) of Germany, 49.9% interest.
In early February, Siemens had converted telecommunication and multimedia business into legally separate unit. This will allow the company to respond faster and adapt more effectively with a more favorable cost position.
Fundamentally, there are a few positive factors for SI:
- Higher revenue growth (3 year average) of 0.7 (vs. the industry average of -0.4)
- Lower debt/equity of 0.6 (vs. the industry average of 1.1)
- Lower P/E, P/B, and P/S of 14.6, 2.4, and 0.9 (vs. the industry averages of 21.1, 2.7, and 1.5)
- Lower Forward P/E of 13.3 (vs. the S&P 500's average of 13.9)
- SI generates a strong operating cash flow of $8.69B with a levered free cash flow of $3.00B
- SI has 5 year average dividend yield of 2.30% and currently offers a forward annual dividend yield of 2.70%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend, but the MACD difference continues to decline gradually. RSI (14) is showing a bullish lean at 58.69. SI is currently trading above its 50-day MA of $106.51 and 200-day MA of $96.08, as seen from the chart below.
How to Invest
Similar to UTX, SI is a great long-term investment holding for cash flow investors with its strong cash flow generation ability. There should be more upside potential in the long term with 62.70% long term annual growth estimate for the next 5 years. For bullish investors, a credit put option spread of July 20, 2013 $95/$100 put can be reviewed, which will allow investors to gain some upside credit premium or enable investors to acquire SI shares at a price below $100 upon option expiration.
Note: All prices are quoted from the closing of March 18, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.