Conglomerate plays more than defense

10/27/2008


  Recent Price
$51
  Dividend
$1.54
  Yield
3.0%
  P/E Ratio
11
  Shares (millions)
951
  Long-Term Debt as % of Capital
26%
  52-Week Price Range
$79.30 - $43.28

United Technologies ($51; NYSE: UTX) is best known as one of the largest U.S. defense contractors. But the company’s products range from jet engines to elevators to spacesuits.

Like many defense companies, United Technologies is also somewhat defensive, poised to keep its powder dry even if storms continue for quite awhile. The company can work down strong backlogs during sales lulls, and a broad product mix should support modest growth even if the flow of defense contracts slows after the presidential election. United Technologies also generates more than 41% of sales from the aftermarket — parts and service — which tends to generate steady revenue even during inclement business climates. United Technologies is a Buy and a Long-Term Buy.

Global focus
Per-share profits have risen at double-digit rates in each of the last four years, and recent results suggest solid growth will continue at least through 2009. While sales growth is likely to slow in the year ahead, United Technologies believes it can cut 20% to 25% of supply-chain costs by shifting more production to plants in Eastern Europe and the Middle East.

The company’s best growth opportunities lie in Asia. Fears of an economic slowdown have spread to every region of the world — but “slow” is a relative term. While the growth of China’s gross domestic product is expected to slow from the rate of more than 11% achieved in 2006 and 2007, the Blue Chip consensus projects growth of at least 8.9% this year and next year. Growth in emerging markets is likely to remain well above that of Western economies.

Solid growth
A diverse mix of commercial and defense business has driven strong results. Excluding special items, per-share profits rose 16% in the September quarter, powered by sales growth of 7%. All six of the company’s business units managed both sales and profit growth in the nine months ended September.

In recent months, United Technologies has signed a stream of military contracts (16% of 2007 sales). Commercial and industrial operations (63% of sales) benefited from strong orders in the first nine months of 2008. The Otis elevator and escalator unit has particularly strong backlogs, and it held up well during the commercial-construction slump in 1990 to 1992. The commercial-aerospace business (21%) had been very strong in the 12 months ended June, though orders slowed in the September quarter. Earlier this month, United Technologies extended its contract to service Boeing ($46; NYSE: BA) engines, a deal worth up to $1.4 billion. The Boeing machinists strike could hinder work on the contract. But even if the strike continues late into the fall, United Technologies is unlikely to lose more than $0.05 per share in profits.

Conclusion
At 11 times trailing earnings, United Technologies trades at one of its lowest valuations in 20 years and looks dirt cheap relative to its growth potential. Wall Street expects per-share profits to rise 16% in 2008 and 6% in 2009. Early this month, the company raised its quarterly dividend 20% to $0.385, payable Dec. 10. An annual report for United Technologies Corp. is available from One Financial Plaza, Hartford, CT 06101; (860) 728-7000; www.utc.com.


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