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Based on the International Monetary Fund's (IMF) global economic outlook, published in July 2013, the world economy is expected grow by 3.1% in 2013 and 3.8% in 2014. Growth in advanced economies is projected at 1.2% and in emerging and developing countries at 5.0% in 2013. For 2014, IMF is projecting similar trends, estimated at 2.1% and 5.4%, respectively.

The diversified industrial industry incorporates production and engineering companies, manufacturing a wide-ranging group of products. In this industry, the growth of economic activities has encouraged demand for industrial products, which in turn also increased the need for new and advanced machinery. This encouraging cycle of growth begetting still more growth bodes well for the continued development of global economic growth and marks an optimistic sign for the future prospects of this industry.

In this article, I pick United Technologies Corporation (NYSE:UTX) one of the best companies operating in the diversified industrial industry. This company has been generating solid returns for investors even in a modest economic environment. Let's examine its business model, growth strategy and financial situation to gauge its potential to sustain returns.

Business Model

United Technologies provides high technology products and services to aerospace industries and building systems worldwide. Its segments are UTC Climate, Otis, Controls & Security, UTC Aerospace Systems, Pratt & Whitney and Sikorsky. While economic and political factors on both a regional and global level can affect its operations, to limit the impact of any risk, United Technologies' strategy continues to be the maintenance of a balanced and diversified portfolio of businesses. Its operations include original equipment manufacturing (OEM) and extensive related aftermarket parts and services in both its commercial and aerospace businesses. The company's main customers include both private and government companies and its businesses are geographically diversified, continuing to evolve with the globalization of world economies.

Growth Strategy

United Technologies is actively seeking to capture its share in emerging markets. Growth in emerging markets is mainly driven by China where its sales for the recent quarter grew 11% over the prior year. The creation of UTC Building and Industrial Systems better positions UTC to capture growth opportunities in emerging markets. On the negative side, the European economy continues to stand still. The company's organic sales in Europe declined by 3% across its commercial businesses over the past nine months. However, economic conditions in North America continue to rebound, with improving consumer sentiment, increasing commercial construction and an improving housing market. The European market, combined with U.S. Government defense spending, accounts for over 35% of UTC sales. Last year, Sikorsky and the U.S. Government signed a five-year multiservice contract for around 650 H-60 helicopters.

United Technologies' growth strategy also takes acquisitions and dispositions into account. In February, the company completed the acquisition of Grupo Ascensores Enor, a privately held company which designs, manufactures, installs and services elevators. In 2012, Enor generated sales of approximately $50 million. In the TTM, UTC's investment in acquisitions stands around $120 million, which included a number of other small acquisitions, mainly in its commercial businesses.

Further, United Technologies is aggressively working on the restructuring and divestiture of a number of non-core businesses. UTC is expecting to invest $500 million in restructuring for 2013. The company also sold its Clipper and legacy Hamilton Sundstrand Industrial businesses in 2012. In 2013, it completed the disposition of UTC Power to ClearEdge Power. This disposition resulted in payments of around $48 million. In June 2013, it sold all operations of Rocketdyne to GenCorp Inc. for $411 million. The company is looking to use cash generated from these divestitures to repay debt incurred to finance the acquisition of Goodrich.

Financial Analysis

Global exposure and diversification is key to the continued financial success of United Technologies. With sustained order growth momentum in a majority of its markets, the company continues to generate strong organic growth. At the end of the recent quarter, its top line growth was at 3% over the past year quarter. These gains were driven mainly by prior acquisitions and organic growth. However, restructuring savings and strong cost management led UTC to increase its bottom line by 13%. Its Q3 earnings per share were standing at $1.55/share and its net income at $1.4 billion, both up by 13% over the year ago quarter. The company is expecting earnings per share of around $6.10 to $6.15 for the full year of 2013, representing a growth of 14% to 15%.

Solid top and bottom line growth enables UTC to generate massive cash flows year over year. In the TTM, its operating cash flow is standing at $6.2 billion, capital expenditure at $2.3 billion, and free cash flows are $3.8 billion. As a result, the company's free cash flows are providing adequate cover to dividend payments, which, in contrast, stand at only $1.8 billion. The company has been making huge increases in its dividends over the years, and its recent increase of 10% takes its quarterly dividends to 58.9 cents/share. Still, its payout ratio of 38% allows it to make more increases in dividends. Further, its potential to generate strong cash flows enables UTC to buy back outstanding shares and constantly invest in growth opportunities.

Where Other Players Stand

United Technologies operates in the diversified industrial industry, and its main industry peers are General Electric (NYSE:GE) and Boeing Company (NYSE:BA).

General Electric provides variety of services from aircraft engines, water processing and household appliances to medical imaging, power generation, media content and industrial products and business and consumer financing. General Electric's recent results show that the company is in a strong position to keep its profitability momentum, with order growth at 19% around the globe. With total segment profits increasing by 12% while industrial margins rose by 120 basis points, the company is on track for planned margin expansion of 70 basis points for the full year. GE also offers a dividend of .19 cents/share, which looks completely safe with its strong cash position. The company is also trading at a discount when looking at P/E of 19 and P/B of 2.2 while the industry average is at 20.5 and 3, respectively.

Boeing Co. designs, develops, manufactures, sells and supports commercial jetliners, military aircraft, satellites, human space flight, missile defense, and launch systems and services. Consistently strong operating performance is driving higher earnings, revenue and cash flow. At the end of the recent quarter, its top line growth was at 11% and its bottom line at 16%. Its Commercial Airplanes completed the first flight of the 787-9 and delivered 170 airplanes. Its Defense, Space and Security also generated solid performance and captured $7 billion in new orders. Regardless of the uncertainty of the U.S. defense market, overall, Boeing's customer-focused business strategies are producing strong results. With its solid financial performance, the company's stock has seen a surge over the past year and gained around 80% of value. Consequently, at its current valuation, Boeing looks pricey to me.

Final Notes

This year has been very kind to United Technologies shareholders, seeing shares of this diversified industrial giant climbing 38%. Wall Street analysts expect United Technologies to continue to perform exactly as it has been doing in recent years, estimating approximately 11% higher earnings per share in 2014. Showing solid dividends and a strong financial situation, I believe 2014 will be another great year for United Technologies.

Source: United Technologies On A Winning Streak