Has United Technologies Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if United Technologies (NYSE: UTX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at United Technologies.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

1.9%

Fail

 

1-Year Revenue Growth > 12%

3.3%

Fail

Margins

Gross Margin > 35%

28.2%

Fail

 

Net Margin > 15%

7.6%

Fail

Balance Sheet

Debt to Equity < 50%

109.0%

Fail

 

Current Ratio > 1.3

1.20

Fail

Opportunities

Return on Equity > 15%

22.7%

Pass

Valuation

Normalized P/E < 20

16.55

Pass

Dividends

Current Yield > 2%

2.7%

Pass

 

5-Year Dividend Growth > 10%

12.1%

Pass

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at United Technologies last year, the company gave back the two points that it gained from 2010 to 2011, as debt soared after a big acquisition. Shares have just barely managed to stay in the black over the past year as well.

United Technologies has been a diversified conglomerate for a long time. In addition to its aerospace and defense businesses, the company builds elevators through its Otis division, heating and cooling systems under Carrier, and fire safety systems as well.

Given United Tech's defense concentration, many investors have worried about the impact of sequestration and potential budget cuts on the company. Yet unlike General Dynamics (NYSE: GD  ) , whose big-ticket projects require huge investments that aren't all in line with the Defense Department's priorities right now, United Tech and Boeing (NYSE: BA  ) have both built up a strong enough commercial aerospace presence to survive even fairly severe defense cuts.

The big move for United Tech, though, is its acquisition of Goodrich, which finally closed in July. The move boosts the company's aerospace emphasis, especially as it sold off non-core businesses like its Rocketdyne rocket engine unit to GenCorp (NYSE: GY  ) and its pump and engine control systems division to TransDigm (NYSE: TDG  ) .

In its most recent quarter, United Tech disappointed investors by guiding full-year-revenue estimates down to the lower range of previous expectations. The company blamed overall macroeconomic conditions for the drop.

For United Tech to improve, it needs to focus on integrating Goodrich into its existing aerospace business. If it can do that, the synergies and other benefits could pull United Tech back up toward perfection in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Both United Technology and Boeing have made the most of the commercial aerospace industry. But for Boeing, execution problems and emerging competitors have investors wondering whether Boeing is a buy right now. In this premium research report, two of The Motley Fool's best industrial industry minds have collaborated to provide investors with the key must-know issues around Boeing. They'll be updating the report as essential news hits, so make sure to claim a copy today by clicking here now.

Click here to add United Technologies to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics and TransDigm Group. Motley Fool newsletter services recommend TransDigm Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2012, at 2:05 PM, Mathman6577 wrote:

    The debt should go down next as UTC is divesting some businesses and the proceeds will be used to pay off some of that. There is a plan to also buy back shares again starting next year.

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