United Technologies: Profit From the Global Economic Recovery

If you can tolerate moderate risk, consider United Technologies (UTX), maker of elevators, air conditioning systems, and jet engines -- all of which emerging markets will need to develop their economies. I previously recommended shares of this company on February 13, 2009 at a price of $47.09. I am now reiterating my Buy rating. If you bought UTX in February, you're up an impressive 48%. If you missed out, don't fret: there's much more upside ahead. Industrial giant United Technologies is one of those rare 'mutual-fund-in-one-company' plays, and a superior one at that.
United Technologies Has What Emerging Markets Want
A large backlog in commercial aircraft orders at Boeing (BA) and Airbus, to which UTX supplies jet engines via its lead Pratt & Whitney unit (22% of revenue), is a major strength, moving forward. Further, while domestic travel may experience low revenue growth in the economic recovery's early stage, international travel should return to adequate growth rates in 2010, led by strong emerging market GDP growth. That's good news for future engine orders, moving forward.

Further, economic stimulus spending in the U.S. and in key emerging markets, such as China, bodes well for the company's Otis elevators, which comprise 23% of revenue and its Carrier air conditioning, heating, and ventilation systems, which contribute 25% of revenue. Moreover, the value-adding dimensions of Otis and Carrier can't be underscored enough. If UTX didn't operate in any other business line, Otis -- the world's largest elevator and escalator maker, and Carrier -- the world's largest heating/air conditioning/ ventilation systems manufacturer -- offer two products that are intrinsic to the modern world and they'll play an even larger role in the development of Asia and Latin America than they did during the U.S.'s development.

Meanwhile, the outlook is similar at UTX's Sikorsky unit (9% of revenue). Strong demand for military helicopters from the U.S. and a recovery in international commercial demand adds to the positive story.

Even the company's low-profile UTC Fire and Security division (11% of revenue), is starting to open investors' eyes, amid healthy international demand for fire safety products and services, special hazard detection, and security systems.

In sum, United Technologies is a company operating on all cylinders that's well-positioned for the global economic recovery. Look for 2010 revenue to increase 5% to 7%, with widening margins.

The First Call FY2009/FY2010 EPS estimates for UTX are $4.11 to $4.59. Further, in my interpretation, that $4.59 FY2010 EPS estimate will likely prove to be low. Adjust the 2010 EPS estimate to a more-likely $4.70-$4.90 with a reasonable P/E of 18, and one can see where UTX is headed.

Technically, United Technologies' stock chart is strong -- a staircase, and one in which the stock remains above the key, 50-day moving average, a sign that institutional investors continue to add to/establish their UTX positions. UTX's stock also accelerates to the upside quickly after touching the 50-day MA, a sign that institutional investors are taking advantage of dips.

Hence, according to my analysis, shares of UTX are likely to head much higher. One could make a case against it...if you believe the rest-of-the-world (emerging markets) can do without airplanes, elevators and air conditioning.

Stock Analysis: United Technologies is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in UTX now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your UTX position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $48.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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