We believe that United Technologies (NYSE:UTX) is well positioned to benefit from the improving economies of the United States and the emerging markets. As the housing market in the United States improves, we believe that United Technologies' UTC Climate, Controls & Security segment will prosper as new construction dives demand for its Carrier brand HVAC products. Similarly, increasing international demand for elevators driven by China's continuing building boom should bode well for United Technologies' Otis segment. Much of the construction in China is of high-rise residential/office buildings that use large numbers of Otis' elevators. Also, we see very positive trends in the aerospace area with Boeing's 787 and Lockheed Martin's F-35 production set to ramp-up in the near future. United Technologies is a major suppler to both of these programs and it should enjoy steady profits from its collaboration with Boeing and Lockheed Martin. With these positive trends and the recent acquisition of Goodrich, we believe that United Technologies will perform well over the next few years.
United Technologies is a large United States based, global conglomerate. Overseas sales account for about 60% of United Technologies' total revenues. The firm operates five primary business segments: UTC Climate, Controls & Security; Pratt & Whitney; Otis; UTC Aerospace Systems; and Sikorsky.
The UTC Climate, Controls & Security segment is responsible for 29% of United Technologies' total revenues. This segment manufactures a full line of refrigeration and HVAC products under the Carrier brand for use by both commercial and residential customers. Other products and services provided by this segment are security alarms, video surveillance systems, access control systems, and various fire protection products.
Pratt & Whitney accounted for about 24% of United Technologies' total revenues. Pratt & Whitney is one of the largest aircraft engine manufacturers in the world. These engines primarily power jet aircraft such as commercial passenger jets, corporate/private jets, and military fighter/support aircraft.
Otis is the world's largest manufacturer of commercial escalators and elevators. Otis generates about 21% of United Technologies' total revenues. This segment maintains, repairs, distributes, manufactures and designs a broad line of elevators and escalators. Most of Otis' revenues come from international markets (82% of segment revenues) with China being a large customer.
UTC Aerospace Systems (14% of United Technologies total revenues) provides a wide array of power generation and control systems to aerospace companies as well as the United States government. Most of these products are high-tech electronic components designed to control various subsystems within modern civilian and military aircraft. This segment also provides repair, maintenance, overhaul, and fleet service operations for a variety of commercial and governmental customers. UTC Aerospace Systems has a fairly concentrated customer base with the United States government and Boeing accounting for 24% and 13% of this segment's revenues, respectively.
The Sikorsky segment is primarily a defense contractor with the United States government accounting for 66% of the segment's revenues (12% of United Technologies' total revenues). Sikorsky is the primary contractor for the very popular UH-60M Black Hawk helicopter. Also, Sikorsky is working with the United States Marine Corps to develop the next-generation heavy-lift helicopter, the CH-53K. In addition to manufacturing military helicopters, Sikorsky manufactures commercial civilian helicopters and provides a broad array of services to support its customer's flight operations.
We believe that United Technologies will grow revenues about 12% this year helped significantly by the acquisition of Goodrich in July of 2012. The Goodrich acquisition is expected to be accretive to earnings, in 2013, to the tune of $0.60/share. In the first quarter of 2013, the acquisition added about $0.18/share to United Technologies' earnings. This is in contrast to the dilution of $0.06/share the acquisition caused in 2012. Analysts estimate that United Technologies will earn $6.11/share in 2013 and $6.95/share in 2014. Of the 24 analysts covering the stock, 20 give United Technologies a Buy or Strong Buy rating. We share these analysts' enthusiasm for United Technologies.
In terms of valuation, we believe that United Technologies is a good value at $91.05/share for the following reasons:
- United Technologies has an inexpensive forward earnings multiple of 13.1 times 2014 projected earnings.
- United Technologies has an attractive dividend yield of 2.35% and a history of consistent dividend increases with an 11.5 % increase last year.
- United Technologies has a solid balance sheet with $4.77 billion in cash and $22.82 billion in debt relative to an EBITDA of $10.05 billion.
- United Technologies has an attractive PEG ratio of 1.11
- The median 12-month price target for United Technologies is $102.00/share
- S&P has a Buy rating on the stock (4 out of 5 Stars) and a 12-month price target of $103.00/share.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UTX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.