How United Technologies Can Assist Your Portfolio
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
United Technologies (NYSE: UTX), the Dow 30 industrial giant, is setting out for what should be a year of solid profit gains resulting in earnings in the vicinity of $6.00 a share, according to analysts’ estimates. This compares with last year’s tally of $5.35. The strong growth expectation is attributable to the company’s transformation last year to one focused on aerospace businesses and commercial construction.
The aerospace-related operations were enhanced greatly by the July, 2012 acquisition of Goodrich Corp., a supplier of systems and services to aircraft and engine manufacturers. As for the non-residential construction end market, the 2010 purchase of GE Security helped to broaden its offerings.
Those two businesses might well support growth in 2013.
UTX remains a conglomerate including building product entities and aerospace units, where results can fluctuate on demand in any segment, but a change in one is unlikely to have a severe effect on results. Like counterpart General Electric (NYSE: GE), investments in the right product markets can bring new life to the aged company. Speaking of GE, it has boosted its proportion of renewable energy offerings substantially and forayed further into sectors like healthcare that may be vehicles for profit expansion. I continue to like GE shares based on favorable prospects for many of its core segments. For a more thorough analysis of GE, see my blog dated 11/28/12.
Building Businesses Bouncing Back
Otis, the elevator manufacturing subsidiary, UTX’s largest and highest-margined unit, struggled in 2012 due to weakness in Europe and Asia. Still, given a turnaround in order levels out of China, recently up 17%, as well as the likely impact of cost reductions, a return to income increases seems on tap for this year.
Secondly, the newly created UTC Climate, Controls, & Security segment may well be poised to resume sales increases, given order trends at Carrier (HVAC products) and UTC Fire & Security. Plus, improvements in the operating margin appear probable.
Pratt & Whitney is UTX’s aircraft engine unit. Its disappointing performance in 2012 was caused by lower sales of commercial spares. But, it is realizing many takers for its geared turbofan (GTF) product ,such as Brazilian aircraft maker Embraer, for use in its E-jet. Accordingly, management is guiding toward a profit rebound of 100% to 150% this year behind a sales jump in the mid to high single-digit range.
Next, in looking at UTC Aerospace, a separate unit consisting of Hamilton Sundstrand and Goodrich, sales growth should persist, if only due to the Goodrich addition. Earnings accretion is anticipated from the new subsidiary after it contributed a $0.06 a share loss in 2012.
The only major challenge at this time for UTX might be the helicopter unit Sikorsky. Although orders are at record levels, partially thanks to Denmark’s purchase of MH 60-R maritime models, investments in development of the Chinese military helicopter will crimp results. Sikorsky’s profits are pegged to fall $100 million to $150 million year over year.
Rather than making another large acquisition, UTX has said that it will utilize cash for long-term debt paydown and share repurchases. It will also continue to prioritize margin expansion. All of this leads to rising share net and a cleaner balance sheet, the basis for my recommendation of UTX as part of a long-term growth portfolio. It also pays out a 2.4% dividend yield that may allure income investors alike (see my earlier blog about income holdings).
Similarly, some will want to consider the purchase of a third industrial and aerospace company, namely Textron (NYSE: TXT). It shares facets of both GE and UTX, including a stabilizing finance unit (like GE) as well as a burgeoning aerospace operation, particularly if its business jet unit, Cessna, can return to form. For more on TXT, see my January 23, 2013 blog.
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