United Technologies Corp (NYSE:UTX) reported earnings recently that left investors wondering whether the glass was half-full or half-empty. Revenue of $15 billion beat the average Thompson/Reuters analyst estimate of $14.5 billion, but earnings per share fell short of the estimated $1.42.
So what’s the story with UTX in the midst of a global slowdown and growing concern about defense spending? Considering the degree of uncertainty, is UTX right now a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
While the “fiscal cliff” may be avoided, it is hard to imagine a scenario in today’s political climate that does not call for cuts in defense spending. The issue is how much and where. Once the size and scope of the cuts are known, the certainty could act as a catalyst for United Technologies stock, either up or down.
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E = Equity to Debt Ratio is Close to Zero
United Technologies’ debt position is cause for concern, but when compared to the company’s competitors, the picture looks a bit less grim.Right now UTX has a debt to equity ratio of 1.15 with $28.7 billion in debt and only $6.2 billion total cash on hand. In sharp contrast, competitor Lockheed Martin (NYSE:LMT) has a debt to equity ratio of 2.67 and General Electric (NYSE:GE) stands at 3.52. The best performance among the major defense contractors is Northrup Grumman (NYSE:NOC) at 0.36.
A = A-Level Management Runs the Company
While UTX management’s cost cutting efforts merit praise, the recent shareholder lawsuit does not exactly instill confidence in the hearts of potential investors. While the suit itself might be without merit as the company contends, there is no denying the core issue in the suit. United Technologies was fined for supplying China with software needed to make attack helicopters. The suit seeks to remove the board of directors; an unlikely outcome. However, A Level Management should be able to deal with foreign customers without violating US law.
T = Technicals on the Stock Chart are Strong
The technicals for UTX have been relatively weak all year with multiple crosses above and below the 20 Day, 50 Day, and 200 Day Simple Moving Averages. As of November 13th 2012 the stock price is 0.87 below its 20 Day SMA; 1.98% below the 50 Day SMA; and 6.19% below the 200 Day SMA.
S = Support is Provided by Institutional Investors & Company Insiders
UTX is 83% institutionally owned, far surpassing fellow Dow Component GE’s 55%. The top five holders are Vanguard, Fidelity Investments, Massachusetts Financial Services, BlackRock Institutional Trust, and Capital Research Global Investors.
E = Earnings Are Increasing Quarter over Quarter
Earnings per share for the most recent quarter over quarter comparison decreased 3.9%. However, over the last 5 years, EPS has increased 8.15. While Northrup experienced a smaller decline in quarter over quarter EPS at -2.2%, General Electric came in with an impressive 44% increase and Lockheed Martin had a respectable 11.09% increase.
E = Excellent Relative Performance to Peers
Return on Equity is a favored measure of many investors and on this metric UTX is solid at 22.37%; but not the leader of the pack. That position belongs to rival Lockheed Martin with an astounding ROE of 106.7%. UTX comes in second on Operating Margins as well, with the company’s 14.11% trailing Northrup Grumman’s margin of 37.27%.
T = Trends Support the Industry in which the Company Operates
United is heavily exposed to the defense and construction sectors. Trends in aircraft manufacture bode well for the company’s Pratt and Whitney operation, which accounts for about 23% of 2012 revenue. Part of that comes from defense contracts to go along with the 23% from Sikorsky Helicopters and the Aerospace business. The construction business with Otis elevators, Fire and Security Systems, and Carrier HVAC make up more than 50% of total revenue and the construction industry seems to be slowly recovering. However, the pace of the recovery and the long term uncertainty over how much this country is willing to continue to spend on defense are cautionary signs for UTX.
In the aftermath of the U.S. election, the DJIA has shed about 500 points. Although the news from Europe is undoubtedly a major factor, most market analysts and prognosticators agree the deep foreboding over the impending fiscal cliff is a major factor in the downturn. This is not to deny the role of selling to lock in gains in the belief rates will go up. Assuming we escape the cliff, defense spending is sure to be on the table in any deal negotiated. In the near term cuts in defense spending are likely. What is more potentially troubling is the country’s willingness to continue pouring money into defense in the long term. At best, UTX is a WAIT and SEE. While the current dividend yield of 2.38% is more than respectable, is it enough to justify buying into a company where almost 50% of revenue is shrouded in a cloud of uncertainty?
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