United Technologies (NYSE:UTX) is a diversified company with products ranging from elevators and air-conditioners to jet engines, helicopters and aerospace components. Over the past few years, the company has increased its focus on building and aerospace industry through a combination strategic acquisitions and divestitures. As a result, it has positioned itself firmly to benefit from the recovering building industry and the growing commercial aviation industry.
On the other side, weakness in the global economy is expected to impact the company’s growth in the near term. We currently have a stock price estimate of $86 for United Technologies (UTC), approximately 5% above its current market price.
Factors That Support Current Valuation
1) Growing commercial aviation industry: According to Boeing (NYSE:BA), the global market for commercial airplanes is worth $4.5 trillion for around 34,000 airplanes over the next 20 years.  To take advantage of this large opportunity, UTC has undertaken multiple acquisitions and divestitures over the past couple of years.
In June 2012, it acquired Rolls Royce’s stake in International Aero Engines (IAE) for $1.5 billion, to gain a controlling interest in the same. IAE is a joint venture involving MTU Aero Engines and Japanese Aero Engines Corporation (JAEC) and UTC. It manufactures the V2500 engine, which powers the highly successful Airbus A320 family of aircraft.
Then in July 2012, UTC completed the acquisition of Goodrich Corporation for $18.3 billion. Goodrich which is a leading supplier of aerospace components such as landing gears, aircraft nacelles, and actuation and interior systems, has positioned UTC firmly in the aviation supply chain. Goodrich counts all major aircraft manufacturers including Airbus, Boeing, Bombardier and Irkut among its clients.
UTC also divested a number of its non-core businesses, including the legacy Hamilton Sundstrand industrial businesses a few weeks back for $3.46 billion.  It is also in the process of divesting its Rocketdyne unit to GenCorp, Pratt & Whitney Power Systems unit to Mitsubishi Heavy Industries and UTC Power fuel cells unit to ClearEdge.    As a result of these strategic acquisitions and divestitures UTC has increased its stake and focus on the commercial aviation industry.
2) Recovering construction industry: At the same time the recovering housing market in the U.S. and growing construction industry in the emerging markets, particularly China will benefit UTC by improving sales of its Otis elevators and escalators, Carrier air-conditioners, and building fire-fighting and security systems.
Factors That Can Impact Valuation
However, growth from the growing commercial aviation industry and the recovering construction industry, could be impacted by extended weakness in the global economy. A worsening of the sovereign debt crisis in Europe, sudden tax increases and spending cuts in the U.S. (commonly referred to as the fiscal cliff) and further slowing of growth in emerging economies, especially China could undermine our current valuation of UTC.
Relative Importance Of Various UTC Businesses
The Pratt & Whitney aircraft engines which is a leading supplier of engines to the commercial as well as defense aviation markets, is the largest business segment of UTC constituting nearly 26% of the total company value, according to our estimates. Otis elevators and escalators at 25% is the second largest, followed by UTC Aerospace systems (which incorporates Goodrich) at 19%. Carrier heating, ventilation and air-conditioning (HVAC) system constitutes 14% and Fire and security systems constitute 9% of the total company value, according to our estimates. The remaining portion of UTC’s value is constituted by Sikorsky helicopters.
Of these, the Otis, Carrier and fire and security businesses are closely related to the building industry, while the Pratt & Whitney and UTC Aerospace systems are dependent on the global aviation industry. Together these two industries form the core of UTC’s interest.Notes:
- Boeing market outlook for 2012-2031, December 13 2012, www.beoing.com [↩]
- United Technologies Completes Sale of Industrial Products Businesses to The Carlyle Group and BC Partners, December 13 2012, www.utc.com [↩]
- United Technologies to sell Rocketdyne unit to GenCorp Inc., July 23 2012, www.utc.com [↩]
- United Technologies to sell Pratt & Whitney Power Systems unit to Mitsubishi Heavy Industries, December 12 2012, www.utc.com [↩]
- United Technologies to divest UTC Power unit, December 22 2012, www.utc.com [↩]