United Technologies Corporation (NYSE:UTX) is a diversified industrial and technology conglomerate, offering products and services such as aircraft engines, escalators and elevators, helicopters, heating, ventilating and air conditioning systems, and fire and security products. The company does business in over 180 countries around the world, with its products being sold to businesses, consumers and governments. Founded in 1975, United Technologies (“UTC”) has nearly 200,000 employees spread across 71 countries. It is one of the more innovative companies in the industrial sector, spending around $3 billion in research and development each year, about half of which is funded by customers. UTC is a market leader in most of its business segments, and competes with conglomerates such as General Electric (NYSE:GE) and 3M (NYSE:MMM).
We recently launched coverage of United Technologies with a price estimate of $102, about 20% ahead of the current market price.
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Otis Elevators, Pratt and Whitney Aircraft Engines Drive the Most Value
UTC’s products have historically been organized into six primary business segments:
- Otis: Elevators, escalators, moving walkways and aftermarket services such as maintenance and repair.
- Pratt & Whitney: Aircraft engines for the commercial, military, business and general aviation markets, in addition to maintenance, repair and overhaul services and space propulsion systems.
- Carrier: Heating, ventilation, air conditioning and refrigeration products and services.
- Hamilton Sundstrand: Aerospace and industrial products including air compressors, metering pumps and fluid handling equipment, in addition to services such as maintenance, overhaul and repair as well as engineering and technical support.
- UTC Fire & Security: Security and fire safety products including fire and intruder alarms, surveillance systems, hazard detection products, life safety systems and firefighting equipment.
- Sikorsky: Military and commercial helicopters, and aftermarket helicopter and aircraft parts and services.
According to our analysis, UTC’s most important segments are Otis and Pratt & Whitney, which we estimate collectively contribute over 50% of the company’s value. It should be noted that UTC has reached an agreement to acquire Goodrich, a major player in the airplane systems segment. In conjunction with this deal the company has changed its reporting segments: Pratt & Whitney and Hamilton Sundstrand have combined to form UTC Propulsion & Aerospace Systems, and Goodrich will be included in the division when the acquisition closes; Carrier and UTC Fire & Security have combined to form UTC Climate, Controls & Security, while Otis and Sikorsky will remain as standalone business units. Once the Goodrich acquisition closes our analysis will reflect this new structure as well as Goodrich’s results.
Key Trends Affecting UTC
While the company is already a market leader in many established and mature markets, we believe that it will grow at a rapid pace in the near future. While emerging markets will drive growth in the more general industrial businesses (like Otis, Carrier and UTC Fire and Security), the pipeline of innovative technological products in the aviation engines space will help the company drive growth in the Pratt and Whitney business. We expect that the company will enjoy mid-single digit organic revenue growth over the next few years, which will gradually slow as the company’s international markets mature.
Innovation, Emerging Markets to Drive Growth
With 61% of its sales coming from international markets, significant demand growth from markets like India and China will help United Technologies drive its revenues. Otis is the market leader in China, which is the fastest-growing elevator market in the world. Similarly, increasing urbanization and rising disposable income in emerging markets is likely to drive significant aircraft demand, which in turn will drive demand for aircraft engines, equipment and services. According to the 2011-2030 market outlook published by Boeing, there will be demand for over 33,000 aircraft worth $4 trillion in the next twenty years. 
Sales Growth and High Margins Make Otis the Most Important Segment
Otis is a global market leader in the escalator and elevator business and is well-positioned to take advantage of the significant growth opportunities in markets like India and China, which are expected to experience the next boom in construction and infrastructure. Due to its brand image and high-quality products and services, Otis is able to command better margins than most competitors. We expect that these margins will come under pressure as new competitors offer lower prices, but if Otis is able to maintain its quality and brand image the impact is unlikely to detract significantly from the division’s value.Notes: