In recent weeks, all the talk in Washington has been about the fiscal cliff, sequestration, and what effect a significant slowdown in defense spending might have on America's defense contractors.
In some cases, investors are right to worry. For example, spending constraints already have armored vehicles maker General Dynamics (GD 0.76%) talking about the need to lay off perhaps 98 workers if the Pentagon does not proceed with planned upgrades on its Stryker fleet. Boeing (BA +0.36%), too, took an axe to middle management positions in its defense business earlier this month in an attempt to cut costs and salvage profits. And in Maryland, Northrop Grumman (NOC 0.24%) last month cut 350 jobs in its electronics systems unit, citing a need to keep its costs "competitive in the defense marketplace."
In one instance, however, and speaking only to the near term, investors are getting some reassurance.
This morning, industrial conglomerate and leading defense contractor United Technologies (UTX +1.48%) reassured investors that while it, too, has had to do some belt-tightening, it still expects to hit its numbers for fiscal 2012.
Chairman and CEO Louis Chenevert confirmed to investors this morning that UTX will earn $5.25-$5.35 per share on annual revenues of $58 billion this year. What's more, cash profits should be even richer. Chenevert advised in a statement that "cash flow from operations less capital expenditures" -- a number referred to in the industry as "free cash flow" -- will exceed net income this year.
What's it mean to you?
How good is this news? On the one hand, Chenevert does appear to be projecting lower free cash flow for fiscal 2012 than what the company generated last year. But even in the worst case, it still appears that UTX is projecting free cash flow for 2012 of no less than $4.86 billion, and probably more.
Result: UTX appears to be selling for less than 15 times this year's earnings and free cash flow, alike. That seems a reasonable valuation, given that even pessimistic analysts see the company growing its profits at better than 11.5% annually over the next five years, and given that UTX is still paying shareholders a tidy 2.7% dividend yield.
While perhaps not the best bargain on the planet today (I personally prefer Raytheon (RTN +0.00%) at 9.9 times earnings and free cash flow, 8% growth, and a beefier 3.6% divvy), UTX shares look fairly valued today, and in little danger of a big drop.
