Better Buy Than Boeing
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many investors know about the huge backlog of orders that Boeing (NYSE: BA) is sitting on. At last count, the company had over 3,900 jets in their backlog, and analysts expect increased production to lead to impressive cash flows. In fact, I've written before that some analysts even expect that Boeing's cash flow could more than double in the next three years versus the prior three years. Unfortunately for investors, Boeing management has not shown a willingness to return cash flow to shareholders before, and just because their cash flow increases doesn't necessarily mean that their shareholders will benefit. Instead I would suggest that investors take a look at another company to benefit from this huge airline demand, that company is United Technologies (NYSE: UTX).
United Tech seems uniquely positioned to benefit from Boeing's expected increase in production. The company already runs its own Pratt & Whitney division, and the acquisition of Goodrich Corp. is specifically targeted at improving the company's presence in Boeing jets. Pratt & Whitney represented about 25% of revenues prior to this acquisition, and clearly adding a $16 billion investment will make this part of United Tech. a leading factor in why the company should do well in the future. While Boeing's future profitability will help drive results, investors in United Tech. also get a diversified play on a continued recovery in the economy through the company's other business units. Let's take a look at what else United Tech. is involved in, and see if this could be a good addition to your portfolio.
Investing in United Tech. is like investing in multiple businesses in just one share. The company's growing presence in aircraft engines will probably take over being the leading revenue generator for the foreseeable future. Pratt & Whitney designs and manufacturers aircraft engines, industrial turbines, and space propulsion systems as well. One of their major competitors in aircraft engines is General Electric (NYSE: GE). While GE participates in the aircraft engine market, the company's main two profit centers are Energy Infrastructure and GE Capital. While GE could be a good play on the recovery in the economy, it is less of a direct play on the huge demand for aircraft over the next several years. While the Pratt & Whitney and Goodrich combination is United Tech.'s future, the present is dominated by the company's UTC Climate, Controls, and Security division.
UTC represents about 33% of total revenues at United Tech. The company is the leader in heating, air conditioning, and refrigeration. This division also participates in building controls and safety systems. In the recent quarter revenue declined 11.05%, but through expense management income increased 18.65%. The building controls and safety business shows such long-term competitors as Johnson Controls (NYSE: JCI). Johnson Controls has been around since the 1800s and a significant portion of their business (hence the name) is building management. The major challenge in the industry is with the slowdown in the economy, businesses are putting off major expenditures until they get some clarity about the direction of the economy. This actually should be a good thing longer-term for both companies. As the economy recovers, businesses will upgrade their systems to realize cost efficiencies and both United Tech. and Johnson Controls should benefit. United Tech. operates a few other smaller divisions, but the one other that should lead to future growth is the company's Otis unit.
Otis is the world's leading manufacturer of elevators, escalators and moving walkways. This is a business directly tied to the health of the economy, as all of these solutions are put in place with new economic development. This division of United Tech. represented about 22% of total revenues in the most recent quarter. While both revenue and income were down, this is attributable to the fact that many developers are holding off on large investments until the economy shows more signs of life. As you can see, there are several attractive units of United Technologies.
The company's financial statements also show positive signs for investors. United Tech. has improved their operating margin over the last year, and the strong demand for aircraft engines should help improve their margin even further. The company's cash flow from operations increased an impressive 31.4%, and their free cash flow totaled $1.456 billion. This is one of the primary attractions of United Tech. The company's free cash flow payout ratio was just 28.31%. While Boeing hasn't been exactly setting the world on fire by returning cash to shareholders, United Tech. shows just the opposite pattern. The company has increased its annual dividend from $0.88 in 2006 to $2.14 today. In the last three years, the company has also been repurchasing stock with over $1.9 billion in repurchases last year alone. This commitment to return cash to shareholders is why I think United Tech. could be the best way to cash in on Boeing's future profitability.
Looking at some of the companies I've mentioned, United Technologies shows respectable numbers across the board. While General Electric has a slightly better yield, and Johnson Controls has a slightly higher expected growth rate, neither can match United Tech.'s overall value. We've already ruled out Boeing based on that company's unwillingness to return significant cash flow to shareholders. United Tech. pays a roughly 2.7% yield and we've seen that this payout has been significantly increased over the last several years. The company's investment in their aircraft engine division should allow the company to drive earnings growth going forward. With analysts calling for an EPS growth rate of about 12%, and the stock selling for about 14 times forward estimates, the price looks attractive too. Investors looking for a way to profit from Boeing's huge jet backlog would do well to begin their research with United Technologies instead.
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