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
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Calculator)
|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|
Balance Sheet – 9/30/2013
Earnings Per Share – Diluted
Earnings Per Share – Modern Graham
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