United Technologies: Bottom Line Improvement Continues

Apr.24.13 | About: United Technologies (UTX)

United Technologies Corporation (NYSE:UTX) is a diversified conglomerate, providing high technology products and services to the building systems and aerospace industries worldwide. Despite the mixed earnings results, UTX continues to hold strong cash position while focusing on integration to boost profitability.

Mixed Results

For Q1, 2013, revenue increased to $14.4B, which is below analysts' estimate of $14.9B. However, net income of $1.39 per share is well above the estimate of $1.29 per share. The management also reaffirmed a forecast for full-year profit of $5.86-$6.15 per share on $64B-$65B of sales.

Declining Organic Sales due to Tough Market Conditions

The acquisition of Goodrich and IAE had provided $0.21 of earnings for Q1; however, organic sales declined 2%. However, North America and emerging markets continue to recover while Europe continues to be a headwind. On the positive side, UTX's portfolio is well positioned for a resumption of top-line growth as the year progresses on.

Integration, Growth, and CapEx

Climate, Controls and Securities continued to realize savings from the integration (profit increased 8% while organic sales declined 3%). Otis, on the other hand, is gaining momentum with two consecutive quarters of sales growth. The CapEx for the quarter was $295M, which was up 60% comparing to the same quarter last year, as the company prepares for the ramp in commercial aerospace.

Free Cash Flow, Buyback, and Cash Position

For Q1, free cash flow was 88% of net income. UTX had acquired $335M of stock, and the management expects to buy back similar amount in Q2. In Q1, UTX had paid down $400M of debt while maintaining the cash balance of $4.8B. UTX will continue to de-lever and will pay down about $2B of debt in 2013 ($1B for Q2 and $1B for Q4).

Analysts' Estimates

Analysts currently have a mean target price of $101.43, suggesting 9.19% upside potential based on the closing price of $92.89 on April 23, 2013. Analysts, on average, are estimating an EPS of $6.10 with revenue of $65.10B for 2013, which is 12.80% higher than 2012. For 2014, analysts are expecting an EPS of $6.99 with revenue of $68.62B, which is 5.40% higher than 2013.

Fundamentally, UTX's key stats will be compared with its peers in the conglomerates sector, including General Electric Company (NYSE:GE) and Textron Inc. (NYSE:TXT), to see where it stands.

United Technologies

General Electric

Textron

Cap Size

$85.18B

$223.56B

$6.98B

Closing Price (April 23, 2013)

$92.89

$21.50

$25.72

Beta

1.05

1.61

2.65

Revenue Growth (3 Year Average)

3.3

-1.7

5.2

Operating Margin, %, ttm

13.3%

11.8%

6.9%

Net Margin, %, ttm

8.9%

9.3%

4.8%

ROE

21.5

11.4

20.5

ROA

6.8

2.0

4.4

Debt/Equity

0.8

1.9

1.2

P/E

17.4

15.6

13.4

Forward P/E

13.0

11.2

9.8

Projected Dividend Yield

2.29%

3.56%

0.31%

Click to enlarge

Source: Morningstar and Google Finance

While both GE and UTX are diversified conglomerates, GE has a large exposure on the financial side (GE Capital); thus, GE has a much higher debt/equity ratio. UTX, on the other hand, has higher margins, ROE, and ROA than TXT, supported with a lower debt/equity ratio, when comparing to TXT. UTX also offers a higher dividend as compared to TXT with a much lower beta. GE does offer a strong cash flow with a solid cash position despite mixed earnings results for Q1.

Technically, the MACD (12, 26, 9) is showing a bearish trend. The momentum indicator, RSI (14) is showing a near neutral momentum at 49.07. UTX is currently trading around its 50-day MA of $92.16 and above its 200-day MA of $82.26, as seen from the chart below. In the near-term, it is crucial to see if UTX can hold above its 50-day MA to determine its short-term direction.

Click to enlarge

Source: StockCharts.com

How to Invest

Despite mixed Q1 results, UTX continues to improve its bottom line through integration. By deleveraging, UTX continues to strengthen its balance sheet while it continues to generate strong cash flow. For bullish investors, it will be safer to see if UTX can hold above its 50-day MA support before establishing the long-term position. Investors can also review the following ETFs to gain exposures to UTX:

  • Dow Jones U.S. Aerospace & Defense Index Fund (NYSEARCA:ITA), 9.39% weighting
  • Industrial Select Sector SPDR (NYSEARCA:XLI), 5.47% weighting
  • SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR), 4.71% weighting

Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GE over 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.