Chuck Carnevale's  Instablog

United Technologies (UTX) is a diversified global provider of high-technology products and services for building systems and aircraft. From an operating perspective, this stalwart blue-chip has weathered the recession better than other well-known peers. Although earnings and market price sagged in 2008, both are recovering quickly as the economy and stock market improves.

When viewed from the perspective of our Fundamentals-at-a-glance earnings and price correlated research tool, United Technologies’ (UTX) operating excellence versus its peers’ is clearly evident. Figure 1 shows United Technologies’ (UTX) stock price since 1996 overlaid on their earnings growth. As you can see, stock price tracked earnings very closely over the years. When the price (black line) rose above the earnings line (green line with white triangles) it always returned to the earnings justified price and vice-versa.

Fig. 1. UTX 15yr EPS Growth and Stock Price Correlation

Notice in Figure 2 that shareholder returns closely matched the rate of change of earnings and were greater than the S&P 500. Also, in Figure 2 you can see that the dividend growth has coincided with earnings growth.

Fig. 2. UTX 15yr Dividend and Price Performance

Figure 3 looks at General Electric, Co. (GE) its better known competitor from the same price to earnings perspective. Due to GE Capital, their large finance arm, General Electric, Co. suffered a large earnings drop and was forced to cut their dividend by approximately two thirds. In a November 5, 2009 Article Titled “In Shift, GE Seeks Lessons from Recession Stumble,” The Wall Street Journal explains how GE and other firms are adapting during this time of change.  

Fig. 3. GE 15yr EPS Growth and Stock Price Correlation

Therefore, Figure 4 calculates how this once double-digit grower saw shareholder returns sink to a low single-digit result. The necessary dividend reduction was difficult for shareholders as well.

Fig. 4. GE 15yr Dividend and Price Performance

Figure 5 looks at Honeywell International, Inc. (HON) the most cyclical of the three. Even though Honeywell’s stock price (black line) has been very volatile over short periods (one year or less) its long-term correlation to earnings (green line with white triangles) has been remarkable. Once again, the long-term relationship between earnings and stock price is validated.

Fig. 5. HON 15yr EPS Growth and Stock Price Correlation

In Figure 5 you will see that in spite of poor earnings from 2000 to 2004 Honeywell did not cut their dividend, however, they did not increase it either due to weak earnings. (See orange shaded areas Figures 5 and 6.)

Fig. 6. HON 15yr Dividend and Price Performance

General Information

United Technologies Corp. (UTX) operates in six business units, most of which are more generally recognized names than the parent. Management estimates that United Technologies Corp. (UTX) will do over $53 billion in revenues in 2009.

1.     Pratt & Whitney - generates 27% of operating profits
2.     Carrier Air Conditioning - generates 17% of operating profits
3.     Otis Elevators - generates 32% of operating profits
4.     Sikorsky Helicopters - generates 5% of operating profits
5.     Hamilton Sundstrand Industrial - generates 13% of operating profits
6.     UTC Fire & Security - generates 6% of operating profits

Strong Management

United Technologies Corp. has long been recognized for its excellent and talented management team. The majority of the operating record depicted in Figure 1 came under the leadership of George David, generally recognized as one of America’s best CEO’s. In April of 2008, the reins were turned over to the capable hands of Louis R. Chênevert who was elected President and CEO. Louis had served as President of Pratt & Whitney since April 1999.

As the world economies entered the severe down cycle of 2008, United Technologies Corp.’s skilled management was able to implement a well executed restructuring plan. As a result, hundreds of millions of dollars in savings should translate into strong profit growth as world economies improve. China, for example, represents a very attractive opportunity for the important and largest profit contributing division – Otis elevators and escalators.

The Future

United Technologies displays extraordinary earnings prowess for a multi-national company with an almost $60 billion market cap. The consensus earnings forecast expects United Technologies’ earnings to grow by 10% or more for the next five years. This implies solid double-digit returns coupled with an attractive current dividend yield that is expected to grow as well. We believe that United Technologies Corp. (UTX) is a solid choice for the conservative long-term investor seeking above average growth, coupled with a good and growing dividend yield all from an extremely high quality company.

Full Disclosure: Long UTX at time of writing.