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Is United Technologies a Buy?

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It's beginning to look a lot like Christmas for United Technologies (NYSE: UTX  ) shareholders. On Friday, CEO Louis Chenevert delivered a bundle of holiday cheer: After earning $4.70 per share this year, UTC intends to plow ahead and grow that number 7% to 14% in 2011, earning somewhere between $5.05 and $5.35 per share on sales of $56 billion or better.

Most of the growth will be "organic" in character, but UTC does leave room for a percent or three to come in the form of acquisitions. Best of all, management promises that earnings quality will be strong, and is convinced that free cash flow will exceed reported "net income" under GAAP accounting standards this year. Next year's less certain, but management's going to do its best to keep free cash flow "equal to or in excess of net income" once again.

What this works out to, valuation-wise, is a stock selling for about 16.7 times current-year earnings and free cash flow, and for roughly 15.1 times next year's numbers. While that may not sound expensive -- a share of General Electric (NYSE: GE  ) will set you back 19.2 times earnings, while unprofitable Textron (NYSE: TXT  ) fetches more than 18x next year's promised profits -- I'm still not certain UTC's shares are a good deal.

For one thing, a 16.7 trailing P/E tops the level of the company's average P/E score for the past five years. For another, long-term, analysts are expecting UTC to basically perform as promised in 2011 alone -- 10% annual profits growth. Toss in a 2.2% dividend, though, and you're still looking at a John Neff-style "total return ratio" of nearly 0.75 -- hardly a bargain.

What's an investor to do?
So is that it? UTC's too expensive -- end of story, move on to the next article? Never fear, dear Fool. I wouldn't do that to you. While UTC may not offer much potential for profit, the CEO's comments on broader market trends just might. According to Chenevert, UTC is seeing "end market improvement" for its products, "with particular strength in emerging markets and commercial aerospace aftermarket."

This suggests you might have some luck hunting for deals in adjacent industries. Relative to UTC, both Boeing (NYSE: BA  ) and its supplier, Spirit AeroSystems (NYSE: SPR  ) , look cheaper at just under 14x earnings. Still, don't get carried away and go buying everything aerospace. Speculation concerning a wave of new airplane purchases over coming decades has shares of Honeywell (NYSE: HON  ) , Precision Castparts (NYSE: PCP  ) , and other aerospace suppliers commanding even higher valuations than UTC's own.

Long story short: Bargains are out there, but in today's frothy market, you'll have to hunt for them.

Precision Castparts is a Motley Fool Stock Advisor pick. Spirit AeroSystems Holdings is a Motley Fool Hidden Gems selection, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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