United Technologies (NYSE:UTX) remains a compelling investment opportunity as the company is developing a stable foothold in foreign markets. The company has been able to improve various management metrics over time, which reflects the company's ability to manage operations effectively.
United Technologies has consistently improved its profitability over the past ten-years. This shows that management is extremely effective at deploying capital and anticipating future cash flow needs.
While the improvement in profitability is not tremendous, the trend in profitability is clearly defined. The company's profitability increased from 7.20% in 2003 to 8.89% in 2012. The company's management has been able to improve profitability by 16.9 basis points per year over the past ten years. The trend is predictable, so therefore the company's profitability will improve in future years.
The company's stock buyback program varies, but one consistency can be defined. The company, has increased share buy backs, from $124 million in 2003 to $1.95 billion in 2012. The company's share buy-back program per annum has increased by 14.7 times, implying that investors could anticipate much larger share buy-back programs over the next ten years.
United Technologies inventory levels have consistently improved. Higher levels of inventory will lead to further revenue recognition in future accounting periods. This will lead to a higher earnings per share and is an accurate indicator for future revenues and net income. In 2012, the company's inventory broke above the ten-year average implying that the company's profitability may exceed expectations in future accounting periods.
The company is heavily diversified internationally. The company's management is heavily focused on Asian market penetration, implying that the European business division will represent a smaller percentage of sales over time. The favorable economic environment in Asia will further support the growth in the Asia Pacific.
According to Schlumberger (NYSE:SLB), the worldwide GDP is projected to grow at 3.5% for 2013, and 3.9% for 2014. This implies that United Technologies' economic environment is both stable and will continue to improve going forward. It is also anticipated that the eurozone will exit out of recession by the end of 2014 barring any unforeseen circumstances. This could be an unanticipated catalyst for earnings in the upcoming quarterly reports.
The company is a compelling investment due to improving profit margins, share repurchases, Asia-pacific growth, and higher inventory levels.
United Technologies is in a strong up-trend as the company is trading at new all-time highs. The company has been able to break above a multi-year descending triangle formation. A strong up-trend has been established based on the chart formation.
Source: Chart from freestockcharts.com
The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock has broken the upper trend line of the descending triangle. The stock will appreciate over the long-term and is in the beginning stages of a multi-year up-trend.
Notable support is $68.00, $72.00, and $88.00 per share. Notable resistance is $100.00, $115.00, and $130.00 per share.
Analysts on a consensus basis have reasonable expectations for the company going forward.
Past 5 Years (per annum)
Next 5 Years (per annum)
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
Source: Table and data from Yahoo Finance
Analysts have reasonable expectations as analysts on a consensus basis have a 5-year average growth rate forecast of 13.65% (based on the above table). This growth rate is below the industry average for the next 5-years (15.60%).
Source: Table and data from Yahoo Finance
The average surprise percentage is 10.3% above analyst forecast earnings over the past four quarters (based on the above table).
Forecast and History
Source: Data from YCharts
The EPS figure shows that throughout the 2003 to 2008 period, the company was able to grow earnings. Throughout 2008-2009, earnings declined. Following the great recession, the company was able to grow earnings per share to new all-time highs.
Source: Data from YCharts
By observing the chart, we can conclude that the business is somewhat cyclical and is affected by macroeconomics. Therefore, one of the largest risk factors to UTX is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.
By 2018, I anticipate the company will generate $13.29 in earnings per share. This is because of product growth, improving global outlook, cost management and continued development overseas.
The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.
Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.
Source: Data from YCharts and price history is from Yahoo Finance.
UTX currently trades at $93.20. I have a price forecast of $99.29 for December 31st 2013. The stock is currently trading below valuation, and should be bought at pull backs as a part of a longer-term accumulation strategy.
Over the next twelve to twenty-four months, the stock is likely to appreciate from $93.20 to $114.24 per share. This implies 22.57% upside from current levels. The technical analysis indicates a long-term up-trend. While the previously mentioned price forecast using fundamental analysis further supports the assessment.
Investors should buy UTX at $93.20 and sell at $114.24 in order to pocket short-term gains of 22.57% between 2013 and 2014.
The company is an exceptional investment for the long-term. I anticipate UTX to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). UTX's primary upside catalyst is international expansion, product development, share buy-backs, and cost management. I anticipate the company to deliver upon my forecasted price target of $200.22 by 2018. This implies a return of 135.40% (including dividends) by 2018. This is a great return for an aerospace and defense stock.
Dividend Yield @ $93.43 per share
A higher yielding investment opportunity-- albeit having a higher risk-- is to buy the Jan 17, 2015 calls at the $95.00 strike. The call premiums trade at $8.21. The price forecast for the end of 2014 is $114.24. The rate of return if the calls expire at $114.24 is 134.35%, the option will break-even when the stock trades at $103.21.
The risk-to-reward on the option is decent. The risk is reasonable (1.1 beta).
United Technologies has a market capitalization of $85.6 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.
United Technologies continues to expand across the globe with its unique product offerings, ranging from the elevator, airplane components, and the Apache chopper. The company will generate reasonable rates of return over time which should keep investors enthusiastic.