Between the second quarter of 2012 and now shares of United Technologies (UTX) have risen about 60%, and excellent return for investors of course, but current levels the stock is trading at 19x earnings and valuation concerns are real. Consensus estimates are for the company to earn $1.28 per share when it reports earnings on Tuesday, basically in line with the earnings reported in the same period one year ago. Arguably, the past three quarters have been solid for United Technologies, but with an anticipated growth rate barely at 10% going forward, the current multiple is questionable.
In addition, the aggressive increase in share price does not correspond with earnings growth, instead shares of United Technologies have increased much more aggressively than corresponding earnings growth since the second quarter of 2012, and that also is a fundamental concern for investors. When stocks increase faster than earnings anticipated future growth is sometimes the catalyst, but growth rates for United Technologies are not expected to be as robust, and if this earnings season is any indicator, earnings growth may actually be subsiding considerably.
Investors in United Technologies should be extremely cautious and monitor the forward guidance carefully because if there is any hiccup, or indication that the full year results will not match the 10% EPS growth expectations that exist today, the multiple will almost surely contract. Currently, United Technologies is richly valued; the stock has increased aggressively, and has only recently begun to stall.
In fact, according to our real time trading report for United Technologies, the stock has recently tested a level of longer-term resistance and it has already begun the process of retracing back towards longer term support again. For anything serious to happen, longer term support would also need to break, because this stock is in a longer-term upward sloping channel and by definition higher lows and higher highs should be expected unless the channel itself breaks.
Immediately, there is downside risk given the fundamental concerns and the test of longer-term resistance that has happened in United Technologies, but serious risks to investors in this stock will only surface if longer term support levels also begin to break.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.