United Technologies Corporation (NYSE: UTX), the Connecticut-based conglomerate that makes everything from elevators to jet engines, is having a good 2018.
The company is managing to outperform the market in a somewhat sluggish sector and has issued positive guidance for the rest of 2018. But it faces exposure from China tariffs and a possible trade war with Beijing and there are indications the company may spin off one or more units.
[See: 7 of the Best Stocks to Buy for 2018.]
So, UTX stock a good buy for long-term investors? Let’s take a look.
United Technologies stock at a glance. UTX stock is up about 7 percent in the last six months, compared to a 12.8 percent loss in diversified operations sector as a whole. The company had a solid first-quarter report, with earnings increasing 19.6 percent from the previous year. EPS was $1.77, beating analysts’ expectations of $1.55. Sales were $15.24 billion, up 10.3 percent from a year ago and topping expectations of $14.5 billion.
United Technologies raised its full-year earnings guidance to between $6.95 and $7.15 per share, up from the previous range of $6.85 and $7.10. Revenue guidance was increased from a range of $62.5 billion to $64 billion to a range of $63 billion to $64.5 billion.
UTX, founded in 1934, currently trades near $121 per share with a consensus one-year price target estimate of around $150 per share, signaling a strong buy opportunity for investors. Money managers are generally bullish on the stock and favor the company’s diversified business approach. Its units make fire and smoke alarms, aircraft cabins, Carrier air conditioners, Otis elevators and Pratt & Whitney jet engines, among other products.
“I’ve held UTX in client portfolios for a decade, and I continue to like the stock,” says Tom Weary, chief investment officer at Lau Associates in Greenville, Delaware.
Weary describes UTX as a “multi-industry holding company” that spins a profitable revenue web in multiple markets. “UTX is well-diversified, with 50 percent of sales to commercial and industrial markets like Carrier and Otis, 38 percent to commercial aerospace and 12 percent to military aerospace,” he says.
The company’s price-earnings ratio outpaces its sector average and its consensus earnings forecast is up moderately from 2017. Of 19 Wall Street analysts covering the firm, six have UTX as a “buy” or “strong buy” and 13 have the stock with a “hold” recommendation.
Pros of buying United Technologies stock. Some analysts are tempering analyst calls for UTX stock cresting the $150 mark, and Weary is one of them.
“The biggest event on the horizon is the pending $30 billion acquisition of Rockwell Collins, which will beef up the aerospace systems segment,” he says. “This acquisition has led to calls to break up the company into two or three more focused companies. However, it isn’t clear that the sum of the parts is worth any more than the current stock price.”
Weary notes that UTX is currently trading 17 times forward 12-month earnings of $7.23. He values the stock at $130, or 18 times forward EPS, which is right in line with its long-term average. “The segments have different customers and cycles, so there is both a diversification benefit and an analytical challenge in the current holding company structure,” Weary says. “Whether or not to split up the company may depend more on one’s view on “pure plays” than a financial argument at the current stock price.”
[See: 10 Long-Term Investing Strategies That Work.]
Others are more bullish on United Technologies stock.
“UTX’s return on invested capital has outpaced the cost of capital each year since 2008, which really adds to our positive outlook on the company,” says Maggie G. Johndrow, a financial advisor with Farmington River Financial Group, in Farmington, Connecticut, where UTX is headquartered. “Even in a bullish case where the [next-generation Geared Turbofan] margins do not improve within the next several years, many analysts still see a positive return on invested capital.”
United Technologies still remains a leader in a number of key global industries and likely will benefit in the long-term from the expansion of the middle class in emerging markets, Johndrow says. “Furthermore, the reduction in corporate tax rates in the new tax law and anticipated infrastructure spending have generated optimism for the company,” she says.
Cons of buying United Technologies stock. While there really isn’t any groundswell to avoiding UTX, there are some potential speed bumps facing United Technologies.
“At their investor day conference at the end of February the company announced that they are contemplating breaking up into three companies: climate, control, and security; elevators; and aerospace,” Johndrow says. “That said, the general consensus among analysts is that the probability of this happening is about 50 percent, meaning investors should likely not invest in the name, simply hoping the break-up is some sort of catalyst. We expect clarity on this decision by the end of 2018.”
Broader macroeconomic activity could hold back UTX, as well.
“Year to date, the stock has performed mostly in line with the overall industrial index and underperformed the S&P 500 due to worries about a trade war with China,” says Patrick Curtis, a former investment banker and now chief executive officer at Wall Street Oasis. “What has held back the stock in the past has been periodic growth concerns, such as those attributed to slower spending on construction, impacting purchases of elevators and air conditioning.”
Specifically, Curtis and his team of analysts have noted two consecutive years of declining sales at the Otis elevator business along with some hiccups along the way in the aerospace business. “Despite those hiccups, the aerospace business continues to drive results,” Curtis says. “In the most recent quarter Pratt & Whitney’s commercial aftermarket business was up 25 percent and aerospace systems was up 10 percent.”
The bottom line. Johndrow believes United Technologies will continue to grow, especially as tailwinds in aerospace support increased revenue.
“We will continue to watch Pratt & Whitney’s new geared turbofan engine, which should be helpful for the company,” she says. “Much depends on how the acquisition of Rockwell Collins plays out and how streamlined the new engine process becomes, since they did run into some design flaws and greater than expected costs.”
[See: 7 Stocks That Soar in a Recession.]
Overall though, calls for United Technologies to reach the $148 to $150 level may be too optimistic.
“A consensus UTX price target of $148 is over 20 times forward earnings, a 25 percent premium to the S&P 500 is above its own long-term average,” Weary says. “UTX is a great company, but I’m not sure how they justify that target price.”
More from U.S. News
7 Small-Cap ETFs to Help You Win a Trade War
7 of the Best Tech Stocks to Buy for 2018
7 Energy ETFs to Buy for Oil’s Comeback
Pros and Cons to Buying United Technologies Corporation (UTX) Stock originally appeared on usnews.com
