United Technologies Corporation (UTX) said its CEO unexpectedly retired Monday, which should have unnerved the market, especially since no reason was given. The news is just the latest blow for UTX in a difficult year. Yet even with UTX stock down significantly in 2014, the market didn’t care about the surprise. Perhaps this is the turning point the market has been waiting for.
Indeed, United Technologies stock didn’t much care about the CEO’s sudden departure. UTX was essentially unchanged in early trading.
United Technologies stock has come back strong in the last month, but remains down 4% for the year-to-date. That performance lags the broader market by almost 15 percentage points.
A lot has gone wrong for United Technologies this year, to be sure. Order growth has been weak, and so have margins. A new commercial engine made by UTX’s Pratt & Whitney division suffered a critical failure in a testing facility. Meanwhile, a different model of Pratt & Whitney engine caught fire, which temporarily grounded the entire fleet of F-35 Joint Strike Fighters.
United Technologies said the CEO’s surprise retirement has nothing to do with its financial performance, and it doesn’t really matter if it does. The only thing investors in UTX need to worry about is whether the worst is behind the company and if shares offer a compelling value at current levels.
On the plus side, United Technologies affirmed its 2014 earnings per share outlook of $6.75 to $6.85 and its sales forecast of $65 billion. On the downside, both those targets are below analysts’ average estimates, so if UTX is trying to low-ball Wall Street, it isn’t working.
United Technologies Offers Good Growth for a Megacap
That said, United Technologies still has some pretty good growth in it despite being a megacap. UTX stock, a component of the Dow Jones Industrial Average, has a market value of more than $100 billion, but sales are forecast to increase a respectable 4.2% this year. The Street projects earnings to hit $6.88 per share in 2014, up from $6.21 a year ago.
Sentiment seems to be down on this name if you look at the year-to-date price performance, but by valuation the attitude is less severe. Indeed, United Technology’s forward price-to-earnings multiple (P/E) of 15 is essentially in line with its own five-year average. So UTX stock isn’t cheap, but neither is it expensive.
UTX stock’s forward P/E also offers about a 12% discount to United Technologies’ rivals, according to data from Thomson Reuters Stock Reports. UTX stock also offers a superior dividend to its nearest competitors, with a yield of 2.1% vs. 1.7% for the industry. It also doesn’t hurt that United Technologies has paid uninterrupted dividends for 78 years and has hiked them every year for two decades.
Finally, United Technologies is forecast to grow earnings more than 11% a year for the next five years. That kind of long-term growth forecast justifies the P/E of 15. It’s also a bit better than the industry average.
Assuming that UTX works out whatever kinks have been hobbling the company this year, United Technologies could be a buy depending on your view of the U.S. and global economies. This is cyclical stock dependent not only on defense spending, but global aircraft orders too — among other things. And although the outlook for U.S. GDP growth is pretty good next year, a looming rate hike could be a headwind for United Technologies.
That said, any bumps UTX stock hits because of a rate hike will likely be short-lived, trumped by an improving domestic economy. As for the weaker global economy helping to weigh on orders at United Technologies, in theory that should already be discounted in the share price.
United Technologies isn’t a screaming bargain, but it’s definitely a hold if you own it. Furthermore, it looks like a solid long-term name for total return, with price appreciation and dividends allowing it to beat the market by a decent margin if held long enough.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
