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ModernGraham Valuation: United Technologies Corp (UTX)

 

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Company Profile (obtained from Google Finance): United Technologies Corporation (UTC) provides high technology products and services to the building systems and aerospace industries worldwide. The Company operates in six segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis, Carrier and UTC Fire & Security serve customers in the commercial, government infrastructure and residential property sectors worldwide. Carrier also serves commercial, industrial, transport refrigeration and food service equipment customers. Pratt & Whitney, Hamilton Sundstrand and Sikorsky primarily serves commercial and government customers. In May 2013, the Company announced that it has completed the divestiture of its Pratt & Whitney Power Systems unit to Mitsubishi Heavy Industries Ltd (MHI). In June 2013, United Technologies Corp announced it has closed on the sale of substantially all operations of its Pratt & Whitney Rocketdyne unit to GenCorp.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Calculator)

Key Data:

MG Value $90
MG Opinion Overvalued
Value Based on 3% Growth $82
Value Based on 0% Growth $48
Market Implied Growth Rate 5.36%
Net Current Asset Value (NCAV) -$34.42
PEmg 19.22
Current Ratio 1.25
PB Ratio 3.58

Balance Sheet – 9/30/2013 

Current Assets $29,351,000,000
Current Liabilities $23,519,000,000
Total Debt $19,785,000,000
Total Assets $90,326,000,000
Intangible Assets $43,595,000,000
Total Liabilities $61,749,000,000
Outstanding Shares 941,270,000

Earnings Per Share – Diluted

2013 (estimate) $6.18
2012 $5.35
2011 $5.93
2010 $5.11
2009 $4.50
2008 $5.29
2007 $4.60
2006 $3.71
2005 $3.12
2004 $3.00
2003 $2.51
2002 $2.21

Earnings Per Share – Modern Graham

2013 (estimate) $5.65
2012 $5.34
2011 $5.25
2010 $4.82
2009 $4.53
2008 $4.35

Conclusion:

United Technologies Corp. has had very stable earnings growth and in many respects is a very intriguing company, but it seems the market is overvaluing it at this time.  In the preliminary assessment, the company does not have a very strong current ratio and is trading at a high PB ratio.  These facts combined eliminate the company from contention for Defensive Investors and Enterprising Investors, and places it in our Speculative realm.  From a valuation standpoint, the market is implying a growth rate that simply has not been accomplished by United Technologies Corp.  The company has grown its EPSmg (normalized earnings) by an average of 4.94%, and while the market’s implied rate of 5.34% is not all that much higher than the average, it is still outside the margin of safety.  As a result, any investor looking to enter a position in United Technologies Corp. should do considerably more research, and pay close attention to the 7 Key Tips to Value Investing.

What do you think?  Is United Technologies Corp. overvalued?  Is the company speculative?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in United Technologies Corp. at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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