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United Technologies Bit Off More Debt Than It Can Chew

Down-on-its-luck 3M might be a better play

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If United Technologies does everything it historically has done, it will have $15.2 billion available to repay $14.3 billion in debt. That leaves $900 million for acquisitions and capital expenditure increases, which isn’t much. Given the dividend seems sacrosanct, either the share repurchases will be scaled back or UTX won’t meet its five-year goal to repay the debt. Either way, the above scenario assumes everything goes its way the next five years — and we all know that almost never happens.

Goodrich Shareholders

You’re about to receive a handsome payday and probably are wondering what to do with the proceeds. Many of you will be tempted to roll the funds into shares of United Technologies. Don’t. They’re going to have their hands full integrating Goodrich, and large acquisitions almost never work out as planned. Instead, I suggest you consider 3M (NYSE:MMM), a large-cap with a great group of businesses.

3M’s stock’s had a tough go of it lately, down 12.8% year to date — its second-worst performance in the past decade. It hit an all-time high of $98.19 in July and since then has lost 25% of its value. Investors seem to be focusing on its lackluster forecast for 2011 earnings and the 7% decline in sales in the second quarter from its display and graphics segment, which makes LCD film for televisions, smartphones and tablets.

3M’s forecast of $6.10 to $6.25 per share includes an increase in pension and postretirement benefit expenses of 22 cents per share. Back this one-time expense out and you get year-on-year growth of 12% to 15%. As for the LCD films, it’s an ongoing inventory problem that 3M continues to work through. With operating margins of 22.8% in the division, it’s just a blip. Investors are overreacting. With a dividend yield of 2.9% as of Sept. 28, it’s higher than United Technologies both in terms of percentage and dollar value. Furthermore, its forward P/E of 12 is historically low, as are all the other usual financial metrics.

Bottom Line

3M might not be the steal of the century, but it’s a much better deal than United Technologies, especially after the Goodrich deal goes through.

As of this writing, Will Ashworth did not own any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2011/09/united-technologies-utx-goodrich-3m-mmm/.

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