United Technologies: Ride The Aerospace Upturn

Jan.25.07 | About: United Technologies (UTX)

The blue chip stocks that make up the Dow Jones Industrial Average have a sleepy reputation, but, in recent years, United Technologies Corp. (NYSE:UTX) has delivered exceptional stock performance and growth for such a large company. UTX reported another strong quarter Tuesday, including a 13.6% increase in revenue to $12.79 billion, topping expectations by a comfortable $600 million. Fourth quarter earnings also beat the analyst consensus by two cents per share, underpinned by strong demand from the aerospace and commercial construction industries.

This is a company on the move, and its products keep you moving as well. United Technologies has businesses ranging from aircraft engines and helicopters to elevators and HVAC systems. The company operates in six units: Otis, Carrier, Chubb, Pratt and Whitney, Hamilton Sundstrand, and Sikorsky. UTX is a huge company with $47.8 billion in annual sales, and it is growing earnings in the 12%-15% range.

If those numbers sound interesting, here are a few more to consider. After posting earnings per share of $2.65 in 2004 and $3.12 in 2005, United Technologies earned $3.71 in 2006. The consensus is for $4.12 in 2007 and $4.67 in 2008. Return on equity exceeds 20% currently and the dividend yield is 1.70%. The company has delivered positive earnings surprises for eight straight quarters, and estimates have risen steadily. The stock price is up 35% over the past two years and has nearly doubled since 2003.

UTX 5-yr chart

United Technologies is involved in some fairly cyclical industries--building systems and aerospace--but its diversity helps smooth out some of the swings and investors are definitely liking what they see on the horizon for UTX as a whole. The commercial aerospace industry was in a rather dismal state for years, but the sector is rebounding now and the prospects for the next few years are quite promising. Moreover, the past few years of military conflict around the globe, combined with heightened terrorist activity, bodes well for renewed spending on military aerospace products.

UTX's Pratt and Whitney segment supplies commercial, general aviation, and military aircraft engines. The Sikorsky unit makes military and commercial helicopters. The Hamilton Sundstrand segment provides aerospace and industrial products, and after-market services. Its aerospace products include aircraft power generation management and distribution systems; environmental, flight, fuel, and engine control systems; fuel and special fluid pumps; auxiliary power units; propeller systems; electronic controls and components; and specialized instruments and chemical detection, and monitoring equipment. Its industrial products include air compressors, metering devices, fluid handling equipment, and gear drives.

On the building systems front, UTX's Otis division makes elevators, escalators, and moving walkways. The Carrier segment provides commercial and residential heating, ventilating, and air conditioning [HVAC] systems and equipment; commercial and transport refrigeration equipment; and aftermarket service and components. Chubb segment offers electronic security and fire protection products and services. In the electronic security industry, it provides system integration, installation, and service of intruder alarms, access control, and video surveillance systems. In the fire protection industry, it provides system integration, installation, and service of portable and fixed suppression systems, and fire detection systems.

UTX carries a fair bit of debt on its balance sheet, $8.29 billion as of last quarter. The company is always on the prowl for acquisitions. It spent roughly $4.5 billion to buy other companies in 2005 and keeps $2 billion a year earmarked for acquisitions as a general rule. The company has also been buying back its own stock, and last month it announced a repurchase program to allow for up to $4 billion in buybacks.

United Technologies is a company on the move despite its massive size. Earnings are expected to grow at an average of 11% over the next five years, though with the recent gains in its stock price it's hardly a blue-chip bargain. Nonetheless, it offers a combination of stability, growth, and a chance to ride a cyclical upturn in the aerospace industry.

Disclosure: Author has no position in UTX.