We have already seen strength in industrial sales in many companies, but today's recommendation may be the most promising yet. United Technologies Corp. (NYSE:UTX) is hitting on all cylinders and is poised for both long and short-term gains.
The company reported earnings and hit it out of the ballpark. UTC reported quarterly earnings of $1.20 per share - even including the loss of 12 cents a share due to restructuring charges. That's 4 cents higher than analysts had expected - 16 cents higher, if you take out the one-time restructuring charges.
The good news did not stop there, either. UTC raised its guidance and share repurchases for the year, despite new challenges in Europe. Sales beat expectations and profit margins were higher across the board. Engine maker Pratt & Whitney and international elevator brand Otis were especially strong. That's remarkable considering the market's fear of a double-dip recession and the U.S. Federal Reserve's "uncertain" status about the strength of the economy.
United Technologies leads in most of the major segments in which it participates, and it is a very disciplined and well-managed company. Its cost-containment efforts in the past are translating straight into profits as the business accelerates. And this is what we just saw. At the same time, it puts management in the comfortable position of being able to increase earnings expectations moving forward. Other well-known global UTC brands include Sikorsky helicopters and Carrier air conditioners, refrigeration, and heating units.
We have already seen strength in industrial sales in many companies. These include Caterpillar Inc. (NYSE: CAT), Deere & Co. (NYSE: DE), CNH Global NV (NYSE ADR: CNH), Bucyrus International Inc. (Nasdaq: BUCY) and Joy Global Inc. (Nasdaq: JOYG). Bulk carrier rates, rates paid by bulk commodity shippers, also are going up. This is especially true for coal, which is mainly used in power plants, and electricity has almost a perfect correlation with economic growth in the world.
So, while many are talking double-dip risks and about the many uncertainties facing the global economy, the companies selling heavy industrial machinery see strong growth ahead. This is a very bullish indicator, because heavy equipment purchases demonstrate a buyer's confidence in long-term business prospects.
Additionally, there are strong indications of a turnaround in civil aviation. The airline industry is in the midst of a remarkable recovery that could last at least another year, maybe two. There has been a sharp pick-up in orders globally, and business travelers are coming back. The industry, having undergone consolidation, has shown discipline by controlling capacity. But the key is to keep improving efficiency by moving to newer, more fuel-efficient airplanes.
This trend clearly favors UTC's Pratt & Whitney and Hamilton business units, which expect a pick-up in the second half of the year. The company already has shown strong order flow in Europe and China - two places analysts had expected slowdowns.
Meanwhile, the Federal Reserve issued a very cautious statement on the U.S. economy, emphasizing high unemployment, which suggests the central bank will take a cautious approach to withdrawing any stimulus measures. This is a bullish prognosis for most of UTC's sales, which will benefit from low long-term interest rates.
Once more, the balance of aerospace and defense on one side and global infrastructure on the other - combined with strong execution of cost controls and business development - has made United Technologies a winner. UTC is the poster-child for balance and diversification. And its after-market services, which account for some 40% of revenue, give it a great deal of stability.
The stock is trading at a forward price/earnings (P/E) ratio of just 13 times. This is a nice discount from a standard valuation. In addition, the stock sports a 2.6% dividend yield, which is approaching the neighborhood of the ten-year bond yield. So investors get an income that's comparable to "safe" bonds, while enjoying the upside of a truly great company. They also have the opportunity to buy in at a discount valuation, at the beginning of yet another heavy machinery and infrastructure investment cycle.
Technically, investors would be buying right on top of the 200-day exponential moving average, as the stock prepares to rally. That will lead to both short-term and long-term gains.
Recommendation: For both short-term and long term-holders, buy United Technologies Corp. at market today.
Disclosure: Horacio Marquez holds no interest in United Technologies Corp.