On a generally "green" day for the Dow Tuesday, shares of United Technologies Corp. (NYSE:UTX) performed better than most, posting a 0.75% gain on the day (about twice the average on the index) in response to earnings and revenues that exceeded Wall Street's expectations.
For fiscal Q1 2014, United Technologies reported:
- $14.75 billion in sales, 2% more than recorded in the year-ago quarter, and slightly ahead of consensus expectations
- 30 basis points worth of improvement in operating profit margin, which hit 14.2%
- $1.32 in per share profits, which worked out to a 4% year-over-year decline -- but was $0.05 ahead of expectations (United Technologies also noted that if one-time items were excluded, earnings would have risen 10%.)
- $1 billion in positive free cash flow for the quarter
Respectable results to be sure. And United Technologies added to the good cheer by doubling down on its previous projection of $64 billion in sales for full-year 2014, while narrowing earnings expectations, promising investors at least $6.65 per share in full-year profit -- and perhaps as much as $6.85.
Caveats and quibbles
Still, it bears pointing out that $1 billion in free cash flow was only enough cash profit to back up 83% of United Technologies' $1.2 billion in reported earnings. Also, while management boasted of "continued organic growth and orders strength," the $64 billion in sales that United Technologies guided investors to expect, would only suffice to maintain the 2% sales growth rate seen in Q1. That's hardly a barn-burning pace.
Speaking of growth, United Technologies CEO Louis Chenevert noted in his comments on the quarter that "all five of the segments contributed to United Technologies' organic sales growth in the quarter." In fact, one of these divisions -- Pratt & Whitney -- actually experienced a small decline in sales during the quarter. But to the extent that all five divisions did produce some sales, and that sales overall did grow, the statement seems correct.
Still, it's curious to see that the one division exhibiting the strongest sales growth at the company this past quarter... is also the one division that United Technologies is rumored to be selling: Sikorsky helicopters. If growing sales is the name of the game at United Technologies, then selling the division exhibiting the strongest growth trend seems a funny way to grow the company.
In the best case scenario, and assuming United Technologies tops out its new and improved earnings target, is the stock a bargain? Well, assuming $6.85 per share is earned by year's end, United Technologies stock currently sells for about 17.4 times its projected profits. (It's a bit more expensive than that, if you factor United Technologies' $15.6 billion in net debt into the picture). If all United Technologies' able to manage is something on the order of the 2% sales growth it's projecting for this year, that's a pricey valuation indeed.
In fact, even if long-term estimates for earnings growth (11%) prove accurate, then it's hard to see the stock as much of a bargain at more than 17 times earnings. While a fine business, and a strong performer in Tuesday trading, I don't see much hope for United Technologies stock outperforming the market.