Will United Technologies’ Shares Stay Airborne?

While not necessarily a household name like other multinational conglomerates, United Technologies (NYSE:UTX) has been a longtime stalwart in the industry. The company recently announced solid second quarter earnings, and the stock is up an impressive 41 percent in the past year.

The stock is currently trading right around its 52-week high of $105.66. Will the company continue to surge upward? Let’s use our CHEAT SHEET investing analysis to decide whether United Technologies is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

United Technologies acquired Goodrich — which manufactures landing gear and engine casings for both commercial and industrial planes — last July for $16.4 billion. CEO Louis Chênevert believes the acquisition will improve the company’s position within the commercial aviation industry, which has experienced high growth in the last several years.

Pratt & Whitney — the engines division of United Technologies — has experienced a rise in orders as the airline industry looks to replace aging engines. Large commercial engine orders increased 15 percent during the quarter. Additionally, Pratt & Whitney is in the process of releasing a new energy-efficient ‘geared turbofan engine’ to help aircraft companies combat rising fuel costs. However, reduced military spending, as a result of sequestration measures, has offset some of the revenue growth in this division.

United Technologies’ Commercial Business division has carried the company for the last several years. This unit includes the Otis Elevator Company and heating, ventilation, and air conditioning operations (HVAC). Strong revenue growth in the second quarter from Otis boosted the aggregate top line. North American orders for the quarter increased 29 percent on a year-over-year basis, while sales to China increased an impressive 39 percent.

In addition, North American HVAC sales increased 17 percent for the quarter, thanks to an improving domestic housing market. However, Global HVAC sales decreased 2 percent. United Technologies’ Commercial Business division should continue to grow in the coming quarters, as new housing starts persist in the present low interest rate environment.

E = Earnings are Increasing Year-over-year

United Technologies pleasantly surprised investors last week, with a better than expected earnings announcement. The machinery conglomerate reported quarterly earnings per share of $1.71 and revenues of $16 billion, up 17 percent and 16 percent, respectively, from the same quarter of last year.

In addition, the company reported strong operating cash flows of $3,348 for the quarter — a $322 million increase. The company is currently undertaking a large-scale restructuring program, which will cost around $450 million. However, it estimates savings from the restructuring to be around $555 million for the next two years. United Technologies raised their 2013 full-year guidance to meet analysts’ expectations.

2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2
Qtrly. EPS $1.71 $1.39 $2.26 $1.56 $1.47
EPS Growth YoY 16.33% 286.1% 53.44% 6.12% 1.38%
Qtrly. Revenue $16.01B $14.40B $16.44B $15.04B $13.81B
Revenue Growth YoY 15.93% 15.97% 14.37% 5.67% -4.58%

*Data sourced from YCharts

E = Excellent Performance Relative to Peers?

United Technologies appears to be a value alongside two of its biggest competitors, General Electric (NYSE:GE) and Honeywell (NYSE:HON). The stock is currently trading at a trailing price to equity ratio of 15.21 — lower than that of its competitors, the industry, and the S&P 500 — implying that it is cheap relative to its earnings.

Additionally, while its 2 percent dividend yield lags behind GE, the company has increased its dividend in each of the past eight years and hasn’t missed a payment in the last 18 years. United Technologies also has a respectable debt to equity ratio of 0.76. The company may become less leveraged as it reduces its debt load from the Goodrich acquisition.

UTX GE HON Industry
Trailing P/E 15.21 18.13 20.72 15.90
P/B 3.50 2.07 4.72 20.80
Debt/Equity 0.76 3.01 0.55 1.62
Profit Margin 10.18% 9.74% 8.40% 8.9%
Dividend Yield 2.00% 3.10% 2.00% 2.20%

*Data sourced from Yahoo! Finance

Conclusion

United Technologies is a strong value in the machinery conglomerates sector, with a price to earnings ratio of 15.21. The company has been able to successfully integrate Goodrich, and should realize synergies from the acquisition over the coming quarters, especially if the commercial aviation industry continues to grow at a healthy rate. The company could experience some fallout if interest rates rise and the construction industry slows.

Additionally, it has a high exposure to foreign exchange movements, due to its international operations. However, these risks are largely cyclical, and should not significantly impact the company over the long term. If you are looking for a low risk play in commercial machinery and aerospace manufacturing, United Technologies is an OUTPERFORM.

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