United Technologies Innovates to Crush the Competition

By Michael French - January 17, 2012 | Tickers: GR, UTX | 0 Comments

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Aerospace, climate, and building products manufacturer United Technologies (NYSE: UTX) was busy at the end of 2011, setting itself up for continued growth in the face of economic uncertainty and plenty of competition. United Technologies did not become one of the largest manufacturing companies in the world and a component of the Dow Jones Industrial Average by resting on its laurels. In this article, I anlyze how this conglomerate's management of innovation and intellectual property should be able to power shares forward. Interested investors should use this analysis as a starting point in their research on this company.

United Technologies owns several manufacturing companies that produce, sell and service products in several different industries. Here is the current corporate breakdown with the financial contribution of each division. Financials are based on the first three quarters of 2011.

Pratt & Whitney produces jet engines for commercial airliners and military jets. A Pratt & Whitney engine will power the U.S. military's new F-35 jet fighter. On the commercial engine side, the company's PurePower PW1000G geared turbofan engine was named by Time magazine as one of the "50 Best Inventions of 2011". The division generates 22.5 percent of UTX sales and 21.5 percent of operating profits. Major competition comes from the jet engine division of General Electric (NYSE: GE).

Otis manufactures, installs and maintains elevators, escalators and moving walkways worldwide. In 2011 Otis completed over 12 acquisitions of small regional and local elevator companies. This division generates a significant portion of revenues from service and reconditioning. The division brings in 21 percent of revenue and 31 percent of operating profits.

Carrier provides climate control equipment for commercial buildings, refrigeration equipment for food service, commercial trucks, trains and shipping containers, and passenger climate control for buses and marine transport. The division brings in 21.6 percent of UTX sales and 17.6 percent of operating profit. Competition is primarily from ThermoKing, owned by Ingersoll Rand (NYSE: IR).

Sikorsky designs, manufactures and services helicopters for both the military and commercial markets. Russian immigrant Igor Sikorsky and his company built the first useful helicopter in 1939 and the first production helicopter in 1943. The division brought in 12 percent of corporate revenue and 9.4 percent of operating profits.

Hamilton Sundstrand produces aerospace equipment such as aircraft control systems, engine fuel systems and gearboxes. The company provides life support equipment for NASA. The division produces 10.4 percent of sales and 11.7 percent of profits.

UTC Fire & Security primarily produces fire suppression systems for commercial buildings. The division generates 11.8 percent of sales and just over 8 percent of operating profits.

In September 2011 United Technologies announced a new organization structure to take effect starting in 2012. This year Carrier and UTC Fire & Security will be combined into UTC Climate, Controls and Security Systems with a CEO for the division. Pratt & Whitney and Hamilton Sundstrand will be combined into UTC Propulsion and Aerospace Systems with a Chief Operating Officer – COO.

Also in September the company announced an agreement to buy Goodrich Corporation (NYSE: GR) for $18.4 billion. Goodrich produces aviation equipment and will add to the sales and profits of UTC Propulsion and Aerospace Systems. The deal is expected to finalize in mid 2012. The acquisition will be finance with a combination of debt and stock issuance. The purchase is expected to be a negative on earnings in 2012 and add profits in 2013.

Chairman and CEO Louis Chênevert has issued guidance of $5.30 to $5.50 per share. Without the expenses of the Goodrich purchase the estimate would be $5.80 to $6.00, up about 10 percent from the $5.48 United Technologies is expected to earn for the full year 2011. Fourth quarter and full year results will be announced on January 25. At the current share price, UTX is trading at a P/E ratio of 13.6. United Technologies has a long term history of annual dividend increases. Since 2003, the board of directors has increased the payout by about 20 percent each year. The quarterly dividend has grown from 14 cents in 2003 to the current 48 cents per share. At the current share price the UTX dividend yield is 2.3 percent.

The United Technologies group of companies are all global leaders in their respective sectors. The company continues to expand the reach of those companies through acquisitions. With an emphasis on sales to governments, aerospace and commercial buildings, the company is not immune to economic slow downs. In the recession year of 2009, net income declined by 16 percent and did not fully recover until well into 2011.

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