|Is United Technologies Underappreciated?|
Wednesday July 20, 1:09 pm ET
By Stephen D. Simpson, CFA
Despite a stable of well-known brands, it seems to me that United Technologies (NYSE: UTX) hasn't always gotten its due in the market. Whether that's because many of this conglomerate's businesses are cyclical, because the company doesn't have a flashy CEO, or because the company doesn't really sell to retail consumers, I really don't know. But what I do know is that the company is doing all right these days.
Second-quarter results were solid, if a bit confusing. Revenue rose 16% as reported, with 6% of that revenue labeled as "organic" and 8% coming from acquisitions. Earnings are where that "a bit confusing" part comes in to play. Various benefits, restructurings, and other items take a bit of work to disentangle. But when it's all said and done, adjusted earnings grew by about 16% for the quarter.
Of the individual operating units, all but one posted double-digit operating profit growth. That one was the Carrier unit, where a sluggish residential HVAC market hurt results. So although there was strength in the truck/trailer business, overall operating profits at Carrier slipped by 2%.
The standout grower for the quarter was the company's relatively new fire and security business. Reported revenue climbed 64%, while operating profit rose 69%. Just looking at the numbers, it appears that United Technology has some opportunity to improve margins here and continue to drive good profit growth.
Other United Technologies businesses, including Otis, Pratt, Sikorsky, and Hamilton, all did relatively well for the period, with the first three posting 16% growth in operating profits.
Although I wouldn't describe free cash flow growth as torrid, the company is still growing its free cash flow, and it's doing so while it makes good-sized voluntary pension contributions. This allowed the company to spend $260 million on buybacks in the second quarter, and more repurchases seem likely.
I realize that companies such as General Electric (NYSE: GE), 3M (NYSE: MMM), Tyco (NYSE: TYC), and Honeywell (NYSE: HON) aren't one-to-one comparables with United Technologies, but there are shared similarities. And at least in terms of P/E multiples, United Technologies appears to be a bit of a laggard comparatively.
I'm not generally attracted to these giants of the investment playground, but I do think United Technologies might be worth a look. As commercial construction and aviation recover, the company should be poised for some solid growth.