The opening bell rings. Broad U.S. equity markets open lower, but well above the levels that the pajama crew had placed equity index futures through the dark hours of Friday morning. I watch my favorite aerospace and defense names. Performing well they are, far better than are the oil names anyway. One name though, and it's a Sarge name underperforms the group. Perhaps, because that name is more of an industrial conglomerate with its focus of true aerospace and defense still planned down the road. I speak of United Technologies (UTX) .
Can't really complain. The stock has run 48% over 12 months, and still trades at a below S&P 500 17 times forward looking earnings. Does that matter? The analyst community expects to see Q4 EPS print around $1.84 on revenue of $19.37 billion when those numbers roll in three weeks from now. That would compare as an earnings decline from Q4 2018 (all the rage) on revenue growth of 7.3%. Full year earnings are expected to see 7% growth for 2019, as well as for 2020. Those 2020 numbers may not matter much at all, as the firm is expected to spin off the Elevator business (Otis), spin off the air conditioner business (Carrier), and merge the aerospace business with Raytheon (RTN) . The one to own in my opinion, if only one were to be owned, would be the new merged version of Raytheon, as I have always been a fan of that firm in the first place, but I think all three could be viable.
Two five star analysts have opined on UTX over the past month. Julian Mitchell of Barclay's maintained his Buy rating and set a price target of $165 in early December. Cowen's Cai von Rumohr, who rates UTX as Outperform, also increased his price target in December from $150 to $169. At the time, von Rumohr cited the firm's sum of the parts valuation, margin upturns at the Pratt & Whitney (jet engines) and Otis subsidiaries, as well as synergies to be created through the proposed Raytheon merger as cause for further upside. Yes, you may have seen the news two weeks ago that IndiGo (an Indian airline) had been required to replace 130 Pratt & Whitney A320neo jet engines in Airbus (EADSY) aircraft. While this is indeed a setback, 110 of these engines were expected to have to be replaced, so from a news perspective, this is an increase of 20 engines.
Like A Record
The merge with Raytheon and the triple spin-off are expected to be executed within the first half of 2020. Right now, the firm is somewhat difficult to understand. Andrew Bary said as much in his recent column in Barron's. Bary also named UTX one of his 10 stocks to own in 2020.
This really becomes a story down the road of margin and cash flow. Over the trailing 12 months, United Technologies has produced an operating margin of 14.35%, an operating cash flow of $8.11 billion. Does that expand for investors post-merge, post separation? My gut says yes. My portfolio is betting on it.
What we see here is a breakout above a May through October basing pattern that has survived a major re-test of the upper bound in early December. Bottom line... My target price is $175, well above the street. Why? Because that's what it would take to get me to sell any shares ahead of the planned transactions to come. Simply put, I feel that Wall Street has discounted the name's potential due to the complexity involved as well as the chance that these plans run into a hitch. Hopefully, we, the investors get an earful from CEO Gregory Hayes on January 23rd. Panic Point? $135 because I have to have one, but I do not expect to be flat this name anytime soon.