United Technologies Has Strong Growth Prospects

| About: United Technologies (UTX)
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A number of diversified technology companies have exposure to the aerospace industry as they aim to excel in the industry using their technological expertise and innovation. The demand for these products appears to be expanding as well through increased security concerns in emerging markets. According to Tom Captain, the Vice Chairman and US Aerospace and Defense Leader for Deloitte LLP, a number of key factors are driving the globalization in the industry as technology oriented companies look to further their growth in the segment. These include increased competition and a rise in travel demands. Through globalization, these companies have the capacity to reduce costs and pursue growth in the segment. Furthermore, Captain expects 'game changing' innovations to occur in the segment of the industry which will further reshape the lifestyles of consumers.

United Technologies (NYSE:UTX) is one of the major players in the diversified technology industry with a market capitalization of more than $89 billion. The company has a heavy exposure to the aerospace industry but the overall product portfolio justifies the company as a part of the diversified technology industry.

Source: Annual Report FY12

The above chart is representation of the company's revenue profile across products and regions in FY12. 51% of the company's revenues come from commercial and industrial products which include elevators, heating and cooling solutions and fire and security equipment. On the other hand, almost half of the company's revenues come from the aerospace industry. Most of these revenues are earned through operations in commercial aerospace. This is because comparatively, commercial aerospace is performing better than military and defense aerospace. This is because some of the larger countries which contributed towards most of the demand for defense equipment have reduced their budgets. The commercial aerospace industry on the other hand is being supported by global economic recovery and globalization.

Financial Performance

United Technologies has posted a robust financial performance over the recent few years. The company has shown improvement in its profitability and has quickly recovered from the adverse effects of the financial crisis of FY08.

Data Source: Morningstar

The above chart reflects the income statement statistics of the company's performance since FY09. The purpose of the representation is to project the profitability of the company. The chart evidently shows that the company has experienced a decent top line growth. This growth was supported by cost management as the profits have also increase over this period of four years. The net profit margins also demonstrate an upward trend and going forward, this is a very prominent positive indicator for the company.

Growth Strategy

The company has pursued an aggressive growth strategy by laying emphasis on a number of growth drivers. United Technologies has not relied on a single approach and by simultaneously applying several growth strategies, the company has managed to pursue growth in difficult economic conditions.

Data Source: Morningstar

The above chart shows the capital expenditures and the research and development costs of the company since FY09. We can clearly see that the company has substantially increased its capital expenditures in FY12 as compared to previous years. As the company operates in a strongly competitive environment, competing against industry giants like General Electric (NYSE:GE) and Siemens (SI), it has to innovate and advance its technological expertise consistently. In order to pursue this aspect, the company has shown a constant increase in its research and development costs over these four years. Furthermore, the company has been actively involved in acquisitions in FY12. The company strengthened its position by acquiring Goodrich and achieving majority ownership in IAE International Aero Engines collaboration.

Data Source: Morningstar

The above chart illustrates the growth in total assets which has occurred in the last four years due to the growth strategies pursued by the company. The total assets have shown a substantial upward trend. Specifically, in FY12 a boost has been witnessed in the growth of assets of the company.

What Should Investors Consider?

Despite the growth portrayed by the company in recent years, it is currently trading at a P/E of 18.0 which is approximately 53.9% of the industry's average P/E of 33.4. The company's revenue and net income growth are substantially above the industry averages. Also, the company is offering a decent dividend yield of 2.2%.

Source: Annual Report FY12

The above chart shows the dividends paid per share over the past five years. The growth in the company's performance has been shared with the shareholders as the dividends have also grown by more than 50% in these five years. This shows that along with expansive growth across business operations, investor considerations are also important on the company's agenda.


The company's performance has remained strong and it is aggressively pursuing growth strategies through expansion, research and acquisitions, in order to further its previous performance. At the same time, investor considerations are being addressed through a consistent increase in dividends. On the other hand, the company has a beta of 1.13 and a debt to equity ratio which has been rising in recent years. This increases the risk associated with the company. In my opinion, the company's growth potential is strong and the risk-return metric is worth the consideration. Therefore, I propose a buy recommendation as the stock has the potential to prove extremely profitable in the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.