UTX (UTX) is an example of such a business. As part of our research process, we look at a number of companies and industries each year. As you can tell from the fund’s relatively low turnover, most of that research does not result in a purchase or sale. We regularly nix potential investments because we find them too expensive or too difficult to understand. When we pass on investments solely due to valuation, we are left with “on deck” opportunities. These are companies that the group has thoroughly researched but decided that the price wasn’t attractive enough to warrant purchase. We keep track of these companies and patiently wait for the day when they become available at a price that represents good, long-term value. UTX was one such opportunity that presented itself during the short-lived market dip last October.
UTX is an industrial conglomerate with leading positions in aerospace systems, aerospace engines (Pratt & Whitney), helicopters (Sikorsky), elevators (Otis), climate control (Carrier) and fire/security systems. Each division is a leader in its respective field and features important long-term competitive advantages. UTX generates roughly 50% of its profits from aerospace and 50% from commercial buildings. The strength of the operating businesses has allowed UTX to earn an average return on invested capital in the mid 20’s through the recent economic cycle (i.e., the last 6 years).
Based on our estimate, UTX was available at an owner’s yield of approximately 7% so we established a position. The company’s current valuation presented a reasonable entry price to a wonderful collection of businesses. What’s more, we think earnings will grow faster than GDP and we anticipate company executives will prudently manage capital over the long-term.
We hope to hold businesses like UTX for a long time and welcome the chance to add to our position at lower prices.
From Steven Romick (Trades, Portfolio)'s FPA Crescent Fund Fourth Quarter 2014 Commentary.
