United Technologies: Expect Another 10% From This Defensive Company

Jul.23.14 | About: United Technologies (UTX)


Strong future Earnings Base.

In the face of change Sikorsky Aircraft poised for significant organic growth.

What valuations to expect from earnings growth.

For an investor perusing a company heavily based on aerospace and defense but has significant branches based in commercial industry, United Technologies (NYSE:UTX) is a well run, diversified company worth a further look.

UTX businesses are based in five segments. These segments are:

Otis - A world leading manufacturer of elevators, escalators, and moving walkways.

UTC Climate, Controls & Security - UTC Building & Industrial Systems is the world's leading provider of Building Automation, including fire safety, security, building automation, heating, ventilation, air conditioning and refrigeration systems and services promote integrated, high performance buildings that are safer, smarter and sustainable.

Pratt & Whitney - A world leader in the design, manufacture and service of aircraft engines, auxiliary power units and small turbojet propulsion products.

UTC Aerospace Systems - One of the world's largest suppliers of technologically advanced aerospace and defense products. The company designs, manufactures and service systems and components and provide integrated solutions for commercial, regional, business and military aircraft, helicopters and other platforms. They are also a major supplier to international space programs.

Sikorsky - A world leader in the designing, manufacturing and service of military and commercial helicopters.

Since 2011, the U.S. defense budget has been reduced and has threaten to slow down profit growth UTX's military sales. There have been concerns expressing how the company would fare in the face of these cutbacks and what the company would do to alleviate this issue.

In the section below, I will analyze some aspects of UTX's past performance. From this evaluation, we will be able to see how UTX has fared in the face of reduced U.S. military spending over the past couple of years. Based on this information, we will look for strengths and weaknesses within the company's fundamentals, which should give us an idea of what to expect in the future.

Definitions sourced from Investopedia.


Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at three tests of profitability. They are: net income, operating cash flow and return on assets. From these three metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2011 = $4.979 billion.
  • Net income 2012 = $5.130 billion.
  • Net income 2013 = $5.721 billion.
  • Net income 2014 TTM = $5.788 billion.

Over the last three and a half years, UTX's net profits have increased from $4.979 billion in 2011 to $5.788 billion in 2014 TTM. This indicates an increase of 16.25%.

UTX Chart

UTX data by YCharts

As the chart above indicates, there is a strong relation between the company's net income and the stock price. Despite concerns in 2012, UTX's profits were still very strong, thus warranting the current recovery.

  • Operating income 2011 = $8.099 billion.
  • Operating income 2012 = $7.684 billion.
  • Operating income 2013 = $9.209 billion.
  • Operating income 2014 TTM = $9.170 billion.

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three and a half years, UTX's operating income has also increased substantially. The operating income has increased from $8.099 billion in 2011 to $9.170 billion in 2014 TTM, revealing a 13.22% increase.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2011 = $4.979 billion.
    • Net income 2012 = $5.130 billion.
    • Net income 2013 = $5.721 billion.
    • Net income 2014 TTM = $5.788 billion.
  • Total asset growth

    • Total assets 2011 = $61.452 billion.
    • Total assets 2012 = $89.409 billion.
    • Total assets 2013 = $90.594 billion.
    • Total assets 2014 TTM = $92.142 billion.
  • ROA - Return on assets

    • Return on assets 2011 = 8.10%.
    • Return on assets 2012 = 5.74%.
    • Return on assets 2013 = 6.31%.
    • Return on assets 2014 TTM = 6.28%.

UTX's ROA's has remained relatively flat over the past couple of years, having stated that, the ROA is significantly lower than 2011. This indicates that the company is making less on its assets than it did in 2011 a slow and steady recovery to 2011's numbers is expected.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2011 = $61.452 billion.
    • Total assets 2012 = $89.409 billion.
    • Total assets 2013 = $90.594 billion.
    • Total assets 2014 TTM = $$92.142 billion.
    • Equals an increase of $30.690 billion.
  • Total liabilities

    • Total liabilities 2011 = $37.108 billion.
    • Total liabilities 2012 = $39.572 billion.
    • Total liabilities 2013 = $63.495 billion.
    • Total liabilities 2014 TTM = $58.357 billion.
    • Equals an increase of $21.249 billion.

Over the past three and a half years, the company's total assets have increased by $29.777 billion, while the total liabilities have increased by $21.249 billion. This shows that the company's assets have increased more than the liabilities thus adding shareholder value.

UTX Total Assets (Quarterly) Chart

UTX Total Assets (Quarterly) data by YCharts

From a percentage point of view, the company has been adding assets and liabilities at around the same pace.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2011 = $25.758 billion.
    • Current assets 2012 = $29.610 billion.
    • Current assets 2013 = $29.442 billion.
    • Current assets 2014 TTM = $29.641 billion.
  • Current liabilities

    • Current liabilities 2011 = $18.616 billion.
    • Current liabilities 2012 = $23.786 billion
    • Current liabilities 2013 = $22.800 billion.
    • Current liabilities 2014 TTM = $24.330 billion.
  • Current ratio 2011 = 1.38
  • Current ratio 2012 = 1.24
  • Current ratio 2013 = 1.29
  • Current ratio 2014 TTM = 1.22

Over the past three and a half years, UTX's current ratio has remained relatively the same. As the ratio is above 1, this indicates that UTX would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2011 shares outstanding = 906.80 million.
  • 2012 shares outstanding = 906.60 million.
  • 2013 shares outstanding = 915.10 million.
  • 2014 TTM shares outstanding = 916.7 million.

UTX Shares Outstanding Chart

UTX Shares Outstanding data by YCharts

Over the past three and a half years, the number of company shares has increased from ~907 million to the current amount of 916.73 million. Within the next year as acquisitions look to be "expensive" the company will be putting their free cash into share buybacks and dividend increases. With that in mind, I expect the shares outstanding to be around 2012 numbers in the next year or so.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2011 = $16.037 billion / $58.190 billion = 27.55%.
  • Gross margin 2012 = $15.555 billion / $57.708 billion = 26.95%.
  • Gross margin 2013 = $17.305 billion / $62.626 billion = 27.63%.
  • Gross margin 2014 TTM = $17.318 billion / $64.157 billion = 26.99%.

As the chart below indicates, over the past 10 years UTX's gross margin has remained at an industry leading 27-28% range. Even though UTX has operations outside aerospace/defense with Otis and UTC Climate, that impact margins, UTX gross margin is well ahead of other companies in the aerospace / defense space.

UTX Gross Profit Margin (<a href=

UTX Gross Profit Margin (TTM) data by YCharts

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2011 = $58.190 billion
    • Revenue 2012 = $57.708 billion
    • Revenue 2013 = $62.626 billion
    • Revenue 2014 TTM = $64.157 billion
    • Equals an increase of 10.25%.
  • Total Asset growth

    • Total assets 2011 = $61.452 billion.
    • Total assets 2012 = $89.409 billion.
    • Total assets 2013 = $90.594 billion.
    • Total assets 2014 TTM = $92.142 billion.
    • Equals an increase of 49.94%.

Over the past three and a half years, UTX's revenues have increased by 10.25%. Over the same amount of time, the assets have increased by 49.94%. This imply some weakness as UTX is becoming less efficient at creating revenues based from their assets.

Cash Flow

Free Cash Flow = Operating Cash Flow - Capital Expenditure

Over the past three and a half years, Apple has been able to sustain increasing free cash in every year. In a business that is looking to spend a lot of cash in R&D to support business growth and increasing its dividend to keep shareholders happy, this indicates that Apple can support these costs without adding additional risk to the company and ultimately, the shareholder.

  • 2011 - $6.590 billion - $983 billion = $5.607 billion
  • 2012 - $6.646 billion - $2.932 billion = $3.714 billion
  • 2013 - $7.505 billion - $2.410 billion = $5.095 billion
  • 2014 TTM - $7.928 billion - $2.493 billion = $5.435 billion

The analysis is revealing some very strong results for UTX. Even though revenue growth has only increased by 10.25% over the past couple of years the analysis is revealing that the company's ability to maintain profitability from their revenue has been strong. Based on profitability from revenue UTX's net income, operating income as well as gross margin have been is substantial.

As UTX has $5.435 billion in free cash, Senior Vice President and Chief Financial Officer Greg Hayes stated at the Deutsche Bank Global Industrials & Basic Materials Conference, they intended to use cash to "buyback shares and increase the dividend," thus increasing shareholder value.


In the section below I will use the Discounted Cash Flow valuation model to estimate the current value of UTX's shares as well as using the model to estimate future valuations.

I believe using the Discounted Cash Flow valuation model for UTX to be fair, because DCF analysis can help one see where the company's value is coming from and can generate an opinion based on that.

FY2014 FY2014 FY2014
FY 2014 TTM 5% growth EBITDA 10% growth EBITDA Analyst Estimates FY 2014
Operating Income 9,149
Taxes 2,101
Unlevered Net income 7,048
D&A 1,873
EBITDA $11,022 $11,573 $12,124 $12, 185
Free Cash Flow 5,435.00 5,435.00 5,435.00 5,435.00
WACC 10.45% 10.45% 10.45% 10.45%
Terminal Value 11.23X EBITDA 123,777 129,966 136,155 136,838
Sum of Parts $129,212.06 $135,400.91 $141,589.77 $142,272.55
Net Present Value $116,986.93 $122,590.23 $128,193.54 $128,811.72
Total Debt 20,072 20,072 20,072 20,072
Cash and Cash Equivalents 4,962 4,962 4,962 4,962
Net Debt $15,110.00 $15,110.00 $15,110.00 $15,110.00
Equity Value $101,876.93 $107,480.23 $113,083.54 $113,701.72
Shares Outstanding 916.73 916.73 916.73 916.73
Price Value $111.13 $117.24 $123.36 $124.03
Current Price $110.76 $110.76 $110.76 $110.76
Difference 0.33% 5.85% 11.37% 11.98%
Click to enlarge

Using the DCF above, there are a couple of results based on the projected earnings of UTX.

1. Based on Q2 numbers, the stock is currently slightly overvalued.

2. Based on the rest of the year earnings growth of ~5%, disregarding any share buybacks or debt repayments which management stated they would do, I have a value of $117.24 per share, or ~5.85% higher than the current stock value of $110.76.

3. Based on the rest of the year earnings growth of ~10%, disregarding any share buybacks or debt repayments, I have a value of $123.36 or, ~11.37% higher than the current stock value of $110.76.

4. Analysts at 4-Traders have a FY 2014 target EBITDA of $12,185 billion. With that estimate, I have a valuation of ~$124.03.

Sikorsky Aircraft to lead the way

Sikorsky Aircraft has had a strong 2014 so far and looks to continue its organic growth moving forward. In a recent breakdown of the company's businesses, Sikorsky Aircraft holds ~6% of UTX's total value which is the smallest segment of the company. Looking forward I believe that Sikorsky valuation point will increase significantly over the next couple of years and will show strong leadership within UTX.

The company has a couple of interesting developments in the works.

1. This past quarter, the U.S. Air Force awarded Sikorsky and Lockheed Martin (NYSE:LMT) a $1.3 billion to create the UH-60M derivative to replace the PAVE HAWK, as the Air Force's new Combat Rescue Helicopter. The contract funds the first four aircraft, with 112 total to be procured for up to $7.9 billion. Five more are to be delivered by 2020, with the entire order to be completed by 2029.

2. Sikorsky is partnering with Boeing (NYSE:BA) for its entry on what Sikorsky Aircraft president Mick Maurer describes as the biggest rotor craft program in history. The SB-1 Defiant has tremendous capabilities with potential orders of 4,000 aircraft worth more than $80 billion or ~$20 million each. The initial medium-lift-sized demonstration will fly in 2017 and will be evaluated by the Army for further development.

3. As the U.S. Army is intending to remove AH-64 Apache attack helicopters, Sikorsky has suggested the possibility of buying the S-97 Raider as a replacement. Sikorsky plans to demonstrate the flying capabilities later this year.

The changing face of Military Sales

At this point, the U.S. military is the company's largest customer. Today the U.S. military sales equate to around 2/3rd's Sikorsky's sales. Having stated that, in the face of change, Sikorsky is looking to diversify their customer base. Over the next couple of years Sikorsky is looking to have the U.S. military contribute ~50% of sales while international military customers are expected to contribute the other 50%. The largest growth is expected to come from Asia and the Middle East.


In spite of some concerns over U.S. military spending, UTX's fundamentals are displaying strong of results. Even though the company's revenues have only increased by ~10.25% over the past few years, managements ability to create profitability from that ~10.25% is astounding.

As UTX currently has $5.435 billion in free cash, this gives the investor the knowledge that UTX has the ability to continue to grow its dividend, buy back shares, and ultimately increase shareholder value.

2014 should prove to be an interesting year for UTX. With organic growth in mind, I believe Sikorsky will lead the way for UTX. With significant product orders in store this segment should grow to more than 6% of the overall company valuation.

Based on the valuations above, I believe that UTX possess another 10% upside before the year end as long as the overall market does not hinder its growth. Having stated that, if the market does correct, the investor will have the confidence to know that they are invested in a company that has over $5 billion in cash, a growing dividend that is currently at 2.08% and a company that is globally diversified with products that are in demand.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.