United Technologies (UTX): Blue-Chip Agility

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Now that the midterm elections are over and Republicans control both chambers of Congress, industrial sectors that rely on federal government largesse nervously await further budgetary cuts that could dampen earnings and revenue, especially among defense contractors.

NYSE:UTXBut there’s one industrial giant and major defense player that’s a smart contrarian bet against this fiscal hand-wringing: United Technologies (UTX).

Based in Hartford, Connecticut, United Technologies develops and provides high-tech products and services to the construction and aerospace industries.

Its Sikorsky Aircraft division is a major builder of helicopters for the civilian and defense sectors; company founder Igor Sikorsky designed and flew the world’s first functioning helicopter in 1939.

With a market cap of $98.6 billion, United Technologies is greatly dependent on the aerospace industry, a sector that’s now enjoying record growth. However, the company also boasts a diversified mix of products and services that cushions it from the vicissitudes of the economic cycle.

Meanwhile, the company continually invests a major portion of sales every year (more than 4% in 2013) into research and development, to make sure that it stays on the leading edge of new technologies.

In addition to Sikorsky, United Technologies’ operating segments include Pratt & Whitney, maker of aircraft engines, gas turbines and rocket engines; Otis Elevator, manufacturer and maintainer of elevators and escalators; Carrier, manufacturer of heating, ventilation and air conditioning equipment; and United Technologies Fire & Security, maker of fire detection and suppression systems and security alarms.

Otis and Carrier, renowned brand names, are leading manufacturers in their respective niches and their products are experiencing booming sales as construction activity rebounds.

UTCHeadquartersViewFromTheAncientBuryingGround
Source: Daniel Penfield

Despite some defense industry fears that the Pentagon will tighten its purse strings, United Technologies has been able to leverage its longtime experience and contacts as a defense contractor to secure new military business.

This year, Sikorsky won a fiercely contested $1.28 billion contract to develop new combat search and rescue helicopters for the U.S. Air Force. On Nov. 5, subsidiary UTC Aerospace Systems was awarded a contract worth $22 million for the supply of upgraded wheels and brakes for the USAF’s F-15 fighter jets, with delivery scheduled for the summer of 2016.

When it comes to the Darwinian world of defense competition, Sikorsky’s lobbying and advanced technology have consistently beaten such major rivals as Textron (TXT), parent company of Bell Helicopter.

Flying High

These tailwinds are lifting United Technologies’ earnings and revenue, with higher altitudes likely to come.

The company reported third-quarter 2014 earnings of $1.8 billion, or $2.04 per share, compared to $1.4 billion, or $1.55 per share, in the same quarter a year ago, for a whopping year-over-year EPS increase of 32%. Revenue reached $16.1 billion, an increase of 5% compared to the year-ago quarter. Management reaffirmed its full-year 2014 guidance for $6.75 to $6.85 in EPS on about $65 billion in revenue.

United Technologies should continue its winning ways, as recovery accelerates in aerospace and construction and the company gobbles the lion’s share of military aircraft contracts. The company is a bet on recovery, providing both growth and stability in an uncertain political and investment climate.

And yet, the stock’s 12-month trailing price-to-earnings ratio of 15.8 is a bargain compared to the trailing P/E of 24 for its sector of aerospace/defense products and services. If the economy stalls in coming months, this is one cyclical blue chip that’s unlikely to leave investors feeling blue.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/united-technologies-utx-blue-chip/.

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