Go Long On This Industrial Powerhouse
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United Technologies (NYSE: UTX) released its fourth quarter earnings, and the report was less than stellar. Stock price per diluted share dropped 27% year-over-year to $1.04, but that will not stop United Technologies from a strong performance going forward. In this article, I will explain why investors should go long on United Technologies.
While the fourth quarter earnings report was somewhat lackluster, United Technologies is a global market provider. Recent slowdowns in Europe, lower military engine shipments and the negative impacts from an extensive restructuring all led to the dismal earnings. However, the largest impact to earnings was due, specifically, to restructuring and a one-time charge that led to a loss of $0.25 per diluted share on earnings.
2012 was a year of big moves for United Technologies:
· In July of 2012, United Technologies acquired the Goodrich Corporation.
· In August of 2012 it disposed of its Clipper Windpower section in a sale to Platinum Equity. LLC.
· In December of 2012 it disposed of its Milton Roy Company entity.
· In December of 2012 it disposed of its Sullair Corporation entity.
· In December of 2012 it disposed of its Sundyne Corporation entity.
Furthermore, in the first quarter of 2012, United Technologies also restructured its workforce and it consolidated many field operations in response to the weak global economic environment. However, as a direct result, United Technologies incurred a cost of $268 million in Q4 and an overall cost of $600 million for the year.
United Technologies paid off a very large portion of its outstanding debt, and it now forecasts a year-over-year growth of between 9% and 15% for 2013.
While the global recession influenced reduction of revenue for several of United Technologies divisions, the Otis division experienced a “double digit” increase in its orders due in large part to the reduction of key interest rates by the Chinese government in mid-2012. China is now the largest market for Otis Elevators.
Additionally, we are seeing a revival of both the residential and commercial construction industry in the United States. As a direct result of this revival, United Technologies is seeing a “double digit” increase in orders for its residential HVAC systems.
Debt Load Reduction
United Technologies went a long way in paying down a significant portion of its debt burden. According to the report, in Q4, United Technology reduced its debt burden from $28.7 billion to $23.2 billion. As a direct result, the company’s debt to total capitalization ratio improved from 52% to 46%.
It is important to remember that a large portion of this debt was incurred from acquisitions and not mismanagement or lackluster sales; specifically the acquisition of the Goodrich Company.
The key here is to look at the “big picture” and realize that much of the losses incurred by United Technologies were due to restructuring and the acquisition of both the Goodrich Company and all of the outstanding shares of International Aero Engines that was held by Rolls Royce Holdings.
This is key, as United Technologies removed itself from several non-core businesses and increased its holdings in the global aviation industry. This is critical if you take the time to realize that the demand for flights from developed countries to emerging markets will only continue to grow.
UTC Aerospace Systems is a subsidiary of United Technologies, and what many people do not know is that UTC Aerospace secured a 5-year $70 million contract as the sole supplier on the CFG application for the V-22 program. Furthermore, according to a report by Defense Procurement News, UTC Aerospace Systems received a contract award and delivery orders from the Defense Logistics Agency, Philadelphia, for V-22 CFG spare parts to be supplies to the U.S. Air Force and the U.S. Navy and Marine Corps team. This upgrade program is the culmination of four years of cooperative effort between Boeing (NYSE: BA), Textron (TXT), NAVSUP Weapon Systems Support, NAVAIR, and UTC.
Boeing has seen some significant setbacks recently, specifically with the launch of its 787 Dreamliner aircraft. The company extended the grounding of its fleet of 787 Dreamliner aircraft. This is now forcing airlines to rely on older planes to fill gaps in their routes. For example, LOT Polish Airlines is using Boeing 767s in place of the 787s. A January 16 decision by U.S. regulators to ground the jet will cause further delays, according to an announcement by Boeing. The cause of the grounding stemmed from an electrical flaws that caused a fire on a Japan Airlines jet.
Another key milestone for United Technologies is that the Sikorsky division of United Technologies is seeing an increase in sales of its Sikorsky Global Helicopters (S-92A) for use in the offshore oil and gas industry. Expect to see continued growth in this division as more and more companies prepare to spend billions on acquisition development of oil fields. Case in point:
ExxonMobil (NYSE: XOM) and all the other oil exploration and production companies combined will spend over $650 billion looking for and producing new oil reserves. That is an increase of over $400 billion from 2005, where spending was only $250 billion. Based on the current growth trajectory, spending will exceed $1 trillion by 2016. That level of spending, in a single year, exceeds the gross national product of all but the 15 largest countries in the world. All of this establishment and development of new oil fields will require support services chief among them helicopters; specifically the multi-role/multi-purpose S-92A.
The Bottom Line
Stock prices just broke through its multi-year resistance of about $28 per share at the time of writing. With a $5 billion reduction of its debt load, a shedding of several non-performing business sections and the acquisition of two companies giving United Technologies a larger footprint in aviation, United Technologies is now set to soar.
Further adding to the case for going long, the Board of Directors announced a share repurchase program with the intent of buying back up to 60 million shares of its stock. Reduction of supply means an increase in demand which should result in an increase in stock price.
United Technologies has paid its shareholders a cash dividend every year since 1936. 2012 was no exception as the Board of Directors declared a dividend of 53.5 cents per share. The smart money is long on United Technologies.
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