UNITED TECHNOLOGIES CORP. $106 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 917.5 million; Market cap: $97.3 billion; Price-to-sales ratio: 1.6; Dividend yield: 2.2%; TSINetwork Rating: Above Average; www.utc.com) has four main divisions: Building & Industrial Systems (formed in September 2013) makes heating and air-conditioning equipment under the Carrier brand, as well as burglar alarms, fire-safety products and Otis elevators (50% of 2012 revenue, 61% of earnings); Pratt & Whitney manufactures aircraft engines (24%, 19%); Aerospace Systems makes aircraft controls (14%, 11%); and Sikorsky makes helicopters (12%, 9%).
The recession cut United Technologies’revenue by 11.1%, from $56.8 billion in 2008 to $50.5 billion in 2009. Revenue quickly turned around and rose to $57.7 billion in 2012. The U.S. government is the company’s biggest customer and accounts for roughly 18% of its yearly revenue.
Earnings fell 17.0%, from $4.9 billion in 2008 to $4.1 billion in 2009. The company is an aggressive buyer of its own shares. As a result, its earnings per share fell at a slower pace of 15.6%, from $4.74 to $4.00. Thanks to the higher revenue, earnings improved to $5.2 billion, or $5.35 a share, in 2012.
Acquisitions have also played a large role in United Technologies’growth. As a result, goodwill and other intangible assets of $43.6 billion is a high 45% of its market cap.
However, United Technologies has a long history of successfully integrating new businesses and cutting their costs. The company also cuts the risk of a big writedown by targeting smaller firms that complement its existing operations.
Goodrich purchase starting to pay off
For example, in July 2012, United Technologies bought North Carolina-based Goodrich Corp., which makes aircraft parts, including landing gear, wheels and brakes. Goodrich also maintains and repairs planes. United Technologies paid $18.3 billion for Goodrich, including assuming $1.9 billion of its debt.
To win regulatory approval, United Technologies agreed to sell some of Goodrich’s smaller businesses. The company expects to raise a total of $3 billion when it completes these sales by the end of 2013.
In the three months ended September 30, 2013, revenue rose 2.8%, to $15.4 billion from $15.0 billion. Acquisitions accounted for 2% of that gain. Strong demand for commercial jet engines, elevators and building systems helped offset weaker sales of helicopters and jet engines to military clients. Revenue rose 11% in China and 3% in North America (excluding acquisitions), but fell 1% in Europe.
Earnings in the quarter rose 14.8%, to $1.4 billion, or $1.55 a share. A year earlier, it earned $1.2 billion, or $1.37 a share. If you exclude costs to integrate Goodrich and other unusual items, earnings would have gained 19.0% to $1.63 a share.
Meanwhile, United Technologies is doing a good job of integrating Goodrich. It expects to cut its overall expenses by $237 million a year by the end of 2015 by cutting jobs and closing unneeded facilities.
The company will use these savings and the cash from its asset sales to pay back the money it borrowed to buy Goodrich. As of September 30, 2013, its longterm debt of $19.8 billion was a moderate 20% of its market cap. The company also held cash of $4.6 billion, or $5.13 a share.
Research spending is a hidden asset
United Technologies spent $630 million (or 4.1% of revenue) on research in the latest quarter, up 6.8% from $590 million (or 3.9% of revenue) a year earlier. The gain is partly due to the additional research projects that United Technologies assumed control over after it acquired Goodrich.
Most of the company’s research spending goes to its aerospace businesses. For example, its Pratt & Whitney division is now developing a new jet engine for the U.S. Air Force’s advanced F-35 strike fighter. It’s also working on new engines for upcoming passenger planes made by Boeing, Airbus and Bombardier. In addition, Sikorsky continues to develop new helicopters, including the new CH-53K heavy lift helicopter for the U.S. Marine Corps. Test flights will begin in 2014.
The stock has gained 49% in the past two years. Even so, it trades at 17.3 times the $6.13 a share that United Technologies will probably earn in 2013. That’s a reasonable p/e ratio in light of the company’s leading market share in its various niche industries and wide global reach (overseas markets account for 60% of its revenue).
United Technologies’ earnings should improve to $6.91 a share in 2014 as it realizes more benefits from the Goodrich acquisition. The stock trades at 15.3 times that forecast.
Long history of rising dividends
The company just raised its dividend by 10.1%, to $0.589 a share from $0.535. The new annual rate of $2.36 yields 2.2%. United Technologies has paid a dividend every year since 1936, and has increased the payment each year since 1995.
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