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Summary

  • UTX is a global company that competes in the building systems and aerospace industry.
  • UTX's strong fundamentals over the last 10 years demonstrate its ability to perform in all types of economic climates.
  • UTX is currently trading at attractive valuation after a 14% drop from its highs.

United Technologies (NYSE:UTX) is a large industrial business operating in two major segments which are UTC Aerospace Systems and UTC Building and Industrial Systems. Within each of these segments are major brands, global scale and continuous innovation that provide UTX with an extremely large competitive advantage or 'moat'. This article will detail some of UTX's competitive advantages, fundamentals and finally look at its current valuation.

Competitive Advantages - Brand Names, Global Scale, Vertical Integration

A major global trend that will be carried out over the next generation is the continued urbanization of developing and emerging countries. Accompanying this urbanization will be the steady demand for building systems and increased travel by air. UTX can benefit from both of these trends through some of its 'Brand' names such as OTIS and Carrier in the building systems segment and Pratt & Whitney and Goodrich on the aviation side.

UTX is already the world's largest provider of high technology building systems and is also one of the leading suppliers to the aviation and aerospace industry (see 2013 Annual Report). This global scale and 'Brands Power' provides UTX with a strong competitive advantage when bidding on projects. Finally the acquisition of Goodrich has already demonstrated immediate advantages as it provides clients of UTX with a 'one stop shop' for aerospace needs.

Fundamentals:

The fundamentals analyzed here are over the ten year period from 2004 to 2013 and were obtained from the company's Annual Reports and SEC filings.

UTX has seen a CAGR in revenue of 5.2%, which I believe is impressive for a company of its size and history. Its CAGR in net income has been an impressive 7.3% over this same period. It has paid a dividend for 77 consecutive years and the dividend growth rate is an impressive 12% CAGR over the last 10 years. UTX's ability to increase its dividend at such an impressive rate is partially fueled by its organic growth in revenue and cash flow, but also due to its large buyback program which has retired $12 billion worth of stock since 2007.

On a negative note, UTX's long term debt has significantly increased since 2011, but this was largely due to its purchase of Goodrich. It currently stands at about 37% compared with 28% in 2011. However, compared to General Electric which has a long term debt to capitalization of around 62%, I think that UTX is still in a healthy financial position. Although, some of that GE debt is coming from its financing arm. I think this raise in long term debt to capitalization is acceptable since the company is able to finance the debt at an extremely low rate making the purchase of Goodrich very timely and valuable to the future of UTX.

In terms of returns, UTX has a 10 year average ROE of 19.7%, an average return on invested capital of about 8% (I will discuss how I calculate this in a future article), and a growth rate which I calculate to be about 7.8% (again to be discussed in a future article). All of these numbers are very strong which again highlight the soundness of UTX's business in the industrial space.

I also expect these trends to continue with the continued urbanization. Although UTX does deal with the defense industry which is likely to have a restrained if not contracting budget, only 19% of its net sales from its aerospace division were military related. So a substantial drop in military spending by the US government can easily be overcome through the organic growth it will see in both building systems and commercial aerospace.

Valuation:

Two major things I look at with respect to purchasing a stock are its historic PE ratios and the Graham factor, which states that one should not pay more than 25X the average PE over the last seven years.

Looking at UTX the 10 year average high PE has been 17.6 and the 10 year average low PE has been 12.9. Currently UTX is trading at about 15X 2015 earnings. Finally the Graham factor puts 25 times the average of the last seven year earnings at $125, remembering that this seven year period is including 2008 and 2009.

With UTX trading at around $104 and having fallen about 14% since its highs, I believe that one could purchase this great company for a very fair price and hold it for an extended period of time.

I do not currently own UTX, but I plan on initiating a position once we pass through August and September.

If you have any comments or questions, I will do my best to answer them.

Source: Why United Technologies Will Be My Proxy For Urbanization