United Technologies Set Up Well for 2014

 | Dec 27, 2013 | 11:00 AM EST
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While 2013 has been a strong year for stocks, one stock that has done well but still has room to run is United Technologies (UTX), a major aerospace and commercial construction company. 

Since 2010, United Technologies' management has done an outstanding job of positioning its portfolio for the next global business cycle in the commercial aerospace and commercial construction markets. Their aerospace unit has record orders for Pratt & Whitney jet engines on both Boeing's (BA) and Airbus' aircraft platforms. In key developed markets such as North America and Europe, airlines have placed record orders for significantly more fuel-efficient aircraft, while in the emerging markets of Asia and the Middle East, major national airlines continue to expand basic capacity. Delivery rates should stay strong through 2018 into 2020.

United Technologies has a further opportunity to enhance its aerospace position with its $15 billion acquisition of Goodrich. Goodrich brings vital technology and market positioning to an already strong platform. Goodrich will also generate over $500 million in cost and operating synergies, further boosting earnings.

Besides benefiting from a vibrant commercial aviation market, the company should also see a pickup in the global commercial construction markets. Although commercial construction has been weak in the years since the financial crisis as large corporations have downsized office space and plants, we are beginning to see a gradual pickup in hiring and building activity. Bottom line, corporations and governments have underinvested in commercial construction projects, and their playing catch-up will be a boon for the global construction industry.

United Technologies should benefit from this uptick, as it has maintained and enhanced its market-leading positions at Otis Elevators and Carrier Climate Controls (heating, cooling and ventilation). Both of those divisions should be major beneficiaries of the broader emerging-market infrastructure build-outs.  

United Technologies' share price has jumped by 50% since 2011, but it nevertheless should be a solid company to own in 2014 as its fundamentals continue to build momentum. Shares are still trading at a reasonable valuation multiple at 16.2x 2014's EPS estimate of $6.93. Earnings should continue to grow at 10% to 11% annual levels for the next several years.

United Technologies also pays a reasonable and growing 2.1% dividend. In addition, management has the flexibility to manage its earnings through its ongoing restructuring programs and also has the wherewithal to assist shareholders by employing aggressive share-buyback programs.

We believe United Technologies will be a strong participant in any 2014 market gains as its fundamentals continue to strengthen. Because of the perceived strengthening of the aerospace cycle, an expansion of the valuation multiple above the current 16.2x multiple up to the 17x-18x range is not inconceivable.

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