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As published on Feb 19, Issue 02 Part I of VIC Insights
Company Name: United Technologies Corp
Coverage Region: USA
United Technologies has four main operating segments: Otis; climate, controls, and security; Pratt & Whitney; and UTC Aerospace Systems. The $13 billion Otis segment is the largest manufacturer of elevator and escalator systems in the world, with an installed base of 2.5 million units globally. The $16 billion CCS segment services residential and commercial building markets with branded heating and cooling products such as Carrier and Taylor and fire safety and security products such as Chubb, Kidde, and Edwards.
The $14 billion Pratt & Whitney segment boasts an installed base of nearly 13,000 commercial engines on narrow- and wide-body aircraft and 7,500 military engines primarily for fighter jets. The $14 billion UTAS segment sells components spanning nose to tail in commercial and military aircraft, such as landing gear, interiors, propellers, wheels, brakes, and electronics. Worldwide urbanization and economic growth in emerging Asia markets spur commercial building development, which will benefit the Otis and CCS Segment.
Global reach in each of UTX four operating segments translates into cost-advantages in sourcing, manufacturing, distribution, and aftermarket service. In addition, customers invest significant amounts of capital in order to install and maintain the vital equipment and systems sold by United Technologies. Unplanned downtime in building and aerospace systems can be incredibly costly or even catastrophic when considering the consequences of elevator or aircraft engine failure. This constituted us to believe a high-switching cost and niche market moats are present.
UTX has a consistent long term 10 year eps growth rate of 9% . Operating income is positive and increasing. RoE have been consistently above 15% which met our criteria. However, the debt to equity ratio has increased to 0.64 times which is higher than our recommended value of 0.5. This increases the financial risk of UTX in the event of economic downturn, it’s ability to pay off its debt.
In terms of risk, we see that science and technology risk are present as UTX businesses produces innovative and cutting-edge products. However, the total R&D cost in terms of percentage vs sales is contained at around 4% which seems reasonable.
UTX steadily increasing dividend for the past 10 years makes it an ideal candidate for an income stock. However, the latest dividend at 2.51 USD gives it a dividend yield of about 3% which fall short of our requirement of >5% dividend yield. Based on a long term growth rate of 9%, we would only consider adding this stock to our portfolio when PE drops to 9 or below.
The latest round of insider buying is on 4th Jan 2016. In July 2015, UTX announced that it has reached an agreement to sell its Sikorsky Aircraft business to Lockheed Martin for$9 billion in cash. The transaction is projected to close in the first quarter of 2016. Proceeds from the sale are expected to be used to fund additional share repurchase.
Grey Hayes, former CFO and 25-year United Technologies veteran, replaced long-standing CEO Louis R. Chenevert in 2014. Institutional ownership is around 82% while insider ownership is at 0.05%. Low level of insider ownership may not align management’s interest to shareholder’s interest as much as we like.
Flushed with cash from the recent divestment of Sikorsky, it may increased its dividend payout to reward shareholders.
It is also important to note that nearly two thirds of the company's sales are outside the U.S., which subjects the firm to significant currency risk.
[Report written on 24 Jan 2016]