United Technologies (UTX): A Picture of Consistency

United Technologies (UTX) is one of those companies that can be easy to forget. They are not garnering headlines like major Financials or Tech companies, or like are automakers this week. However, all this Dow Industrials component does is continue plugging away and beating estimates in its last 4 quarters. In one of the most volatile stock markets in recent history, a little “business as usual” consistency is a highly sought after commodity. United Technologies has been growing sales and aggressively cutting costs, but the general economic and market weakness has caused the stock to drop more than 31% year to date.

United Technologies is an extremely diversified company specializing in aerospace, elevators and escalators, heating and air, as well as many other smaller divisions including green energy initiatives. Furthermore, the company is geographically diversified with 62% of revenue coming from outside the United States. The company has been aggressive in pursuing opportunities in emerging markets. This stat (according to Morningstar) blew me away: as of 2007, one-third of the world’s elevators are in China, and UTX has an astonishing 75% market share in Chinese elevators. That’s roughly one-fourth of all elevators in the world, from their Chinese operations alone! It’s not just elevators either, United Technologies won nearly 70% of all air conditioning construction contracts related to the Beijing Olympics. Those are very specific example but they demonstrate the broad range of exposure that United Technologies’ business have throughout the developing world.

United Technologies

United Technologies has demonstrated strong revenue growth especially for a large cap. Revenues have nearly doubled since 2003, but in light of anticipated economic weakness in the quarters ahead, UTX revenue growth estimates have been ratcheted back significantly for 2009. Estimates are for revenue to be only slightly better than flat. One item for consideration, United Technologies has been a major supplier to the U.S. military in its engagements in Iraq and Afghanistan. A new direction, brought by the incoming Obama administration, does place this source of revenue in some doubt. We do not know what portion of revenue is attributable to military contracts, but in 2007 sales in aircraft, aircraft parts and maintenance accounted for 37% of overall sales.

Management seems to be doing the right things by trimming costs wherever possible in the face of slower growth. Return on equity is one measure that we use to numerically evaluate a company’s management. Of course, return on equity can vary greatly from one sector to another, but what strikes us about UTX is their uniformity of results. We would normally consider an ROE of 7% slightly lower than optimal, but UTX is the picture of consistency as the last 10 years have all been between 7.05% and 7.99%. Furthermore, management has just raised the company’s dividend by 20%. While not reading too much into the dividend hike, we like companies that show this outward display of confidence in their business, and it is becoming harder to find in this market.

We have placed an Undervalued rating on UTX because their solid and still improving fundamentals are now supporting a significantly lower price. Historically, the company has traded in the range of 9.75x to 14.16x for price-to-cash flow, but that ratio is currently only 8.05x. Similarly, price-to-sales has normally ranged between .99x and 1.44, but as of our most recent data it is only .86x. This is an example of a good company that is being bullied by a terrible stock market. Sure, the company is going to face macroeconomic difficulties just as every other company, but UTX has very little direct exposure to the credit crisis and they are as diversified as almost any company in the world.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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