Wednesday, October 8, 2008

*Stock Analysis: United Technologies Corp (UTX) A Buy At This Price

Linked here is a PDF copy of my detailed analysis of United Technologies Corp (UTX). Below are some highlights from the above linked analysis:

Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
UTX is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, UTX is trading at a 24.3% discount. UTX earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
UTX earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. UTX has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 15 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
UTX earned no Stars in this section. The NPV MMA Diff. of the $6,349 is below the $7,500 minimum I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 15.0% per year, it will take 10 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Over the last ten years, UTX has shown steady growth in both earnings and dividends. UTX has a strong balance sheet with long-term debt representing about one-fourth of total capital as of December 2007. Future risks could include a prolonged downturn in U.S. residential housing market, slowing of growth in commercial construction markets, commodity price inflation, and capacity reductions by airlines. On the positive side, UTX could benefit from strong international infrastructure demand, backlogs in the aerospace OEM and a weak U.S. dollar. UTX's strong cash flow stream could be used for future share repurchases and dividend increases.

Conclusion: UTX earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks UTX as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $56.27 and UTX's NPV MMA Diff. would still be around the $7,500 NPV MMA Diff. that I like to see. At that price UTX would yield 2.27%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $7,500 NPV MMA Differential I'm looking for, the calculated rate is 15.5%. This dividend growth rate is slightly above the 15.0% used in this analysis.

From a valuation standpoint, I would be very comfortable initiating a position in UTX below $56.27.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in UTX (0.0% of my Income Portfolio) .

What are your thoughts on UTX?