Ken Fisher (Trades, Portfolio) is a billionaire fund manager managing ~$48 bn worth of equity assets through his investment advisory firm Fisher Asset Management, LLC. The firm uses a combination of top-down macroeconomic research and bottom-up, fundamental stock selection process in order to identify potential candidates for its portfolio. United Technologies (UTX, Financial) is one of the major holdings of the firm. As of the last quarter, Fisher Asset Management was holding 8,042,663 shares of the company. Here's a look at the company in detail.
United Technologies Corporation provides high technology products and services to the building systems and aerospace industries worldwide. The company's business is classified into five segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems, and Sikorsky, with each segment comprised of groups of similar operating companies.
Otis: Otis is the world’s largest elevator and escalator manufacturing, installation and service company.
UTC Climate, Controls & Security: UTC Climate, Controls & Security is the leading provider of heating, ventilating, air conditioning (HVAC) and refrigeration solutions, including controls for residential, commercial, industrial and transportation applications.
Pratt & Whitney: Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets.
UTC Aerospace Systems: UTC Aerospace Systems is a leading global provider of technologically advanced aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations.
Sikorsky: Sikorsky is one of the world’s largest helicopter companies. Sikorsky manufactures military and commercial helicopters and also provides aftermarket helicopter and aircraft parts and services.
The company's EPS forecast for the current year is $7.03 and next year is $7.74. According to the consensus estimates, its top line is expected to grow 1.10% current year and 4.8% next year. It is trading at a forward P/E of 15.33. Out of 22 analysts covering the company, 17 are positive and have buy recommendations, and 5 have hold ratings.
The following table shows revenue, EPS and other key metrics of the company over the last couple of years.
Table1: Financial Data of United Technologies
Source: Gurufocus Value Screens
In FY2014, UTX reported earnings per share of $6.82, up 10% year over year and up 12% excluding the impact of restructuring and one-time items. Sales growth was 4% with all five segments growing organically for the year. Segment operating margins expanded by 90 basis points to 16.6%, reflecting the benefit of volume leverage and cost control at CCS, along with lower pension expense, synergies and restructuring benefits at Pratt and UTC Aerospace Systems.
Going forward, while the company's operational growth momentum is expected to continue in FY2015, recent appreciation in the US Dollar versus other currency is expected to be a headwind for the company. The following chart shows how the US Dollar has strengthened against some of the major global currencies recently.
Chart 1: Foreign exchange movements relative to the US dollar
Source: United Technologies Q4 Earnings Presentation
This adverse forex movement is expected to decrease the company's EPS by 30 cents. To offset some of the adverse forex impact, the company has announced that it will be take additional cost actions. Management has also announced that they are now targeting $3 billion of share repurchase which is at the high end of its prior range. Together these actions will result in a 15 cents benefit to the EPS partially offsetting the forex headwind. The company, in its latest earnings release, has lowered its EPS guidance to $6.85 to $7.05 from previous expectation of $7 to $7.20 EPS. However, one should understand that nothing has fundamentally changed in the health of the underlying businesses and all of it is due to unfavorable currency movements.
United Technologies is trading at 16.88 times its FY2015 EPS. It has a forward annual dividend yield of 2.10%. The company has an excellent track record of returning cash to the shareholders through buy backs and dividends. While, the company's EPS growth is expected to slow to 3% this year, it is mainly due to non operational factors. Analysts are expecting the company to return to ~10% EPS growth by next year. Investors with medium to long term horizon can consider going long on the company.
