by Lawrence Meyers | October 27, 2011 8:00 am
Today, we’re looking at Dow Jones Industrial Average component United Technologies (NYSE:UTX), whose company name could not be more boring — which usually is indicative of a great business with terrific stock performance, if you believe Peter Lynch.
I admit I was thrilled to solve a huge mystery in my life in wondering who actually manufactured all those Otis elevators. Seriously, every elevator I’ve ever been in has “Otis” stamped into the metal door saddle. United Technologies also handles escalators and moving walkways. Its Carrier segment offers heating, ventilating, air conditioning, and refrigeration systems, controls, services, and energy-efficient products for residential, commercial, industrial, and transportation applications.
The UTC Fire and Security segment provides electronic security and fire safety products, and heavy equipment. You’ve likely heard of its Pratt & Whitney aviation segment. The company’s Hamilton Sundstrand segment supplies aerospace products. Its Sikorsky segment manufactures military and commercial helicopters.
The key driving factor regarding United Technologies is the macroeconomic picture and, to a lesser extent, competition. Certain products, like elevators, might not sell if construction slows or is halted on large projects. Aviation and aerospace are also susceptible to such downturns. These also are highly specialized fields, so there isn’t much competition, although it does exist. The investor angle of UTX is that it’s a diversified play in some complex areas, and it’s a boring stock. It gets a lot of attention because of its placement in the Dow Industrials.
Stock analysts looking out five years on UTX see annualized earnings growth at 11.8%, with 16% earnings growth coming this year but only 9% next year. So figure 11% annually through 2015. At a stock price of $75, on FY 2011 earnings of $5.47, the stock presently trades at a P/E of 14. It’s tough to find a direct competitor to compare on valuations. Arguably, Boeing (NYSE:BA) and General Electric (NYSE:GE) could be candidates, and they trade at 13.5 and 12.4 P/Es, respectively.
United Technologies’ financials are on solid footing. The company carries $5.4 billion in cash, and $9.5 billion in debt. Trailing 12-month free cash flow was $5 billion, which is more than three times the amount needed to pay the 2.5% dividend. This is what we’ve come to expect from Dow components — tons of free cash flow and safe dividends.
Given the company’s 77-year operating history, there’s no surprise that insider holdings are negligible and insider purchases haven’t happened in ages.
Placing a 13 P/E on United Technologies (a slight, deserved premium given its strong history of free cash flow), with projected 2015 earnings of $9.18 (including dividends) per share, gives us a price target of $120. That is a 60% upside from today’s prices. This is a nice, solid company with great brands and a great business. There is some risk associated with an economic slump, so I might not suggest UTX for retirement accounts.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.
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