Maintaining Stability Through Balance: United Technologies

So the overall market perception of the Industrial sector is that it is an extensively risky place to invest right now. In these volatile times many investors are flocking to the safe-havens offered by Healthcare and Consumer Staples. However, diversification is key to all sound portfolios and thus I am offering you a company that offers stability via balance in the Industrials sector: United Technologies Corporation (NYSE:UTX).

United Technologies is an Industrial conglomerate that provides products and services to the aerospace and building industries. They operate through six segments:

• Otis- designs, manufactures and sells escalators, elevators and moving walkways
• Carrier- manufactures and distributes HVAC and refrigeration systems and equipment, food service equipment, building automation and controls and after market products to the residential, commercial and industrial markets
• UTC Fire & Security- offers fire fighting equipment, fire and special hazard detection and suppression systems along with electronic security, monitoring and rapid response systems
• Pratt & Whitney- provides military aircraft engines, commercial and general aviation, industrial gas turbines and space propulsion systems
• Hamilton Sundstrand- provides aerospace products and after market services like: power generation management, fire protection and detection, fluid handling equipment and many others
• Sikorsky- provides commercial and military helicopters and related after market parts

So now that you know what United Tech does, let’s get into why they make sense in this market. First off, I’m not going to tell you that they have evaded the fall in price of most industrial companies because they haven’t. But I can tell you with certainty that their drop-off in price was unjustified.

As I mentioned before, they provide stability through balance. They do this with the diversification within their business segments. Each one offers a strong product and even though overall industrial demand has weakened, most of these segments have managed to stay strong and thus balance the company out and keep its fundamentals strong. United Tech recently reported third quarter results and I’m going to show you the strength of United Tech by breaking their third quarter numbers down between the segments.

• Otis- revenues increased 11% led by strong new equipment volume, an immensely strong backlog which was up 18% (that is enough to fill one year’s worth of orders for new equipment) and double digit growth in North America, Europe and China. Operating profit also grew 14% which was driven by higher volume and better field installation efficiency which offset the headwinds from higher input costs. Order growth in China was up 30% which offset the weaker demand in the United States which was expected and accounted for due to a canceled project in Las Vegas
• Carrier- revenues were up 5% for the quarter which was led by their capitalization of “energy efficient” trends. Operating margins held flat despite a very tough quarter in a very tough environment. Residential sales for HVAC, as expected slowed however were offset by extremely strong commercial HVAC sales in the United States. Carrier continues to implement cost saving initiatives like restructuring to offset a softer market
• UTC Fire & Security- revenues for the quarter were up a solid 10% due to strong growth in fire and safety in both the Americas and Asia. Operating profit jumped 27% led by the benefits of restructuring, integration and continuing productivity initiatives which generated two-thirds of the profit growth. Operating margins expanded 130 basis points to 9.5% and with the recent strengthening of the US dollar this segment now expects full year operating profit to be up 30% along with mid-teens revenue growth
• Pratt & Whitney- this was one of the segments that lagged the rest with revenue growth of only 3%. Commercial engine business was flat for the quarter despite the number of orders actually increasing. Spare sales were down mid-teens and the book-to-bill was less than one yet again. However, the future still looks promising for this segment. Pratt Canada actually had high-teens revenue growth along with over 35% higher engine volumes and operating profit improving 6%
• Hamilton Sundstrand- revenues for this segment were up 7% led by low double digit growth in industrial businesses and Aerospace growth in the high single digits. Operating profit grew 12% and margins expanded by 80 basis points. This was primarily led by strong growth in commercial spares, industrial volume and lower E&D spent as a percentage of revenues. Their high-powered spares sales growth was driven by end item provisioning
• Sikorsky- extremely favorable trends drove revenues up 10% and operating profit up 29% along with operating margins expanding by 130 basis points to 9.2%. For the quarter, they shipped 40 military and 17 commercial helicopters and are on target to ship 200+ for the fiscal year. They also were granted a huge contract from the Canadian government to deliver H92’s

As you can see the strong and stable growth from most of the segments clearly offset any weaknesses that were exposed this quarter. I feel that the balance between the segments really bodes well for the future of United Tech.

In the current state of the market another important factor to take into consideration is the financial strength of the company. UTX has amazing free cash flow position with FCF in excess of Net Income. They also have limited commercial paper exposure. All of their commercial paper is set to expire soon. They have a credit commitment of $1.5 billion under a revolving credit agreement that serves as a back-up facility for the commercial paper. They have not borrowed from this line of credit, thus showing their ability to pay this off internally. While most companies are struggling to maintain sufficient liquidity in this market, UTX managed to raise their dividend by 20%.

Summary

So I feel that while they have fallen off the face of the earth with most industrial companies that this fall is unwarranted. Their balance between their business segments have managed to stay amazingly strong while most industrial conglomerates post softer numbers. They also have the financial strength to weather such a rough market and let’s not forget they are ridiculously undervalued for no apparent reason at all. So if you are looking for stability and diversification in your portfolio then why not do it through balance with United Technologies?

Disclosure: The mutual fund that the author manages is long UTX.

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