Home > Stock Analysis

Tracking UTX's Moving Parts

Posted: Oct 22, 2008 09:36 AM by Stephen Simpson

Tickers in this Article: DBD, BA, ITW, EMR, DHR, IR, UTX

If you buy into the notion that you really have to dig deep and understand all of a company's moving parts before you can invest, investing in United Technologies (NYSE:UTX) must seem like a full-time job. Sure, there are similarities between many of the company's units (Carrier and Otis are both tied to commercial construction; Sikorsky, Pratt & Whitney, and Hamilton Sunstrand to aerospace), but overall UTX is a lot like a duck - things may seem placid or boring on the surface, but there's a whole lot of paddling going on underneath.

Get Free Stock Analysis By Email

Lining Up the Ducks this Quarter
I'd say that this company had a respectable quarter overall. Revenue rose 7% as reported (about 4% organic revenue growth), and operating income came in more than 8% higher than the year-ago level. That's a pretty solid result when you think about the metals, resins, plastics and other commodities that go into the finished products. Last and never least, the company continues to generate a pretty solid level of free cash flow from the business. (Learn to tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself, in The Essentials Of Cash Flow.)

As is often the case at UTX, some segments pulled a little harder on the oars than others. The Sikorsky and Fire & Security businesses were particularly strong this time around, while Carrier was pretty mediocre and Pratt & Whitney was OK. I don't think there's any particular story to this mix; it's just the nature of being a conglomerate - you typically trade away the prospects of truly excellent growth in exchange for letting go of the risk of really terrible overall performance.

The Inevitable Recession Comment
I'm willing to estimate that UTX's collection of businesses will slow in the recession, but not fall off a cliff. Otis and Carrier will likely see a slowdown in commercial construction (as will competitors like KONE, ThyssenKrupp, and Ingersoll Rand (NYSE:IR)), and I think there's some risk in the aerospace business if the would-be customers of companies like Boeing (NYSE:BA) see business or credit access fall too much.

But UTX is hardly new at this game, and I think management has a good sense of expense control and the preservation of shareholder value. To wit, I never much cared for the prospective acquisition of Diebold (NYSE:DBD), and I think management is right to let this deal die. Perhaps skillful management could have raised Diebold's recently feeble returns on capital, but why take the risk?

A Host of Difficult Choices
With so many quality industrial companies trading at anemic valuations, I would imagine that United Technologies feels pulled in many directions regarding possible M&A activity. I suppose I can sympathize, as there are multiple industrial conglomerates that look like interesting investment opportunities today. Companies like Emerson (NYSE:EMR), Danaher (NYSE:DHR) and Illinois Tool Works (NYSE:ITW) have all sold off with UTX, and the trade-offs between valuation and returns on capital are similar.

Then again, having several quality companies (all possibly trading at interesting valuations) to choose from is a dilemma that most investors don't really mind. I can't pound the table for UTX strongly for that very reason, but I have confidence that this proven winner will continue to show its mettle through the tougher times.

To continue reading about valuing big companies, read Conglomerates: Cash Cows Or Corporate Chaos?

By Stephen Simpson

Stephen Simpson, CFA, has worked as an equity analyst for both sell-side and buy-side investment companies, and presently works as a sell-side equity research analyst. He has worked as a consultant for the healthcare sector, and has written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson is the editor of Kratisto Investing, a website devoted to financial analysis and personal commentary.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS