United Technologies Making All the Right Moves
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
After yesterday’s earnings announcement that United Technologies (NYSE: UTX) grew net income about 10% over Q4 2010, it wouldn’t have been surprising for investors to reward the conglomerate with a nice gain. Alas, it was not to be. After an ever-so-slight pop UTX has settled back to the same spot as before the announcement – the best value in what many consider to be a great sector for the balance of the year.
In the interest of fair play it should be noted that revenue was essentially flat, missing expectations of $15.07 billion by a whisker. Though the $14.97 billion was an improvement over last year, $10 million is $10 million. A more likely reason for UTX’s recent price movement was the announcement by senior management of the company’s intention to raise about $4 billion of the $16.5 billion purchase price for Goodrich by selling non-core assets. No mention of which assets are being considered but it does leave a couple of questions unanswered, and unanswered questions translates to cautious investors.
The idea is sound -- to minimize the amount of stock and debt financing the company has to use. Too much and they risk the possibility of downgrades from credit rating agencies, which can be an extremely expensive proposition at any time let alone when the company needs to secure financing prior to the mid-year acquisition. There is also the risk of diluting shareholder value by using too much for the purchase. The Goodyear purchase is in addition to the smaller but not insignificant $1.5 billion purchase of Rolls-Royce’s share of the International Aero Engines (IAE) venture. Both appear to be sound investments and should positively impact results in the long term.
As for the asset sale there is no shortage of options for the $70 billion company. Among the company's core holdings are elevator operator Otis, HVAC manufacturer Carrier, Sikorsky helicopters, Pratt and Whitney, among other aerospace equipment and service lines.
Three successive years of revenue and profit growth bode well for UTX. And as alluded to earlier, the industry stalwart remains the cheapest of the bunch. Currently trading at just 14.11 times earnings, UTX compares favorably with Honeywell’s (NYSE: HON) 18.24 P/E and smaller HEICO’s (NYSE: HEI) 32.
A large conglomerate in the industrial manufacturing space isn’t generally your 'buy in, ride it high and get out' type of investment. UTX is a sound investment for mid to long-term investors in need of a stock that won't fluctuate wildly, at least no more so than the market itself. The company is trading on the lower end of its 52-week trading range, another indicator the upside potential likely outweighs downside risk in the long run.
United Tech has made some strategic acquisitions, they continually crank out strong cash flow, have $6 billion of cash in the bank and a well diversified portfolio of business lines. The company is also gathering more and more buy ratings daily it seems, and like it or not market sentiment has an impact on stock price. In the case of UTX, investors are going to like it.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.
