Four times a year, United Technologies (NYSE:UTX) reports quarterly earnings, granting investors a snapshot of how things are going at the given instant. But full-year fiscal earnings? Those come but once a year. So while the rest of the market is cheering United Tech's Q4 earnings "beat" ($1.53 per share in "adjusted EPS," a penny ahead of estimates), we here at the Fool are going to skip right past that news -- and go straight to the heart of the matter:
How did United Technologies perform in 2015 as a whole -- and did it do well enough to make the stock a buy?
2015 at a glance
Last year was a big one for United Technologies, marked primarily by the divestment of Sikorsky, and a refocusing of the company's energies on two core business areas: aerospace and buildings. United Tech is making a big bet that keeping these two business spheres, with their superb profit margins, and unloading the lower-margin, more end-market-focused Sikorsky division, is the right way to maximize profits going forward. So how well is that strategy going?
So far, not well. In 2015:
- Organic sales grew a bare 1% in 2015. Fighting forex headwinds of 4%, this resulted in full-year sales sliding 3% to $56.1 billion.
- Profit margins, too, took a tumble. After earning operating profit margins of 16.6% in 2014, UTC saw margins slide 3.6 percentage points in 2015, down to just 13%. Total operating profits dropped 24%, to $7.3 billion.
- Minus taxes, and plus a windfall profit from selling Sikorsky, net profits landed at $7.6 billion.
- Per share, UTC says that worked out to adjusted earnings per share of $6.30 for the year.
From the analysts' perspective, this therefore worked out to a mixed earnings report in which UTC missed on revenues (Wall Street was expecting $57.3 billion) but beat on earnings (which were only supposed to be $6.28). Investors, in contrast, are viewing the year as a win all around, and they bid up UTC shares 0.2% in response on Wednesday, even as the rest of the stock market crashed.
Were they right to do so?
Valuing United Technologies
Call me a crazy optimist, but yes, I think investors are right to be optimistic about United Technologies stock.
Management guided investors to expect $56 billion to $57 billion in sales this year, implying sales growth even despite continued foreign exchange headwinds. Adjusted earnings are expected to hold firm at $6.30 per share at a minimum, and may grow as high as $6.60, a respectable 5% pace. Perhaps best of all, management says that free cash flow in 2016 could run as high as 100% of reported profits. If they're right about that, then 2016 could be the first time in three years that United Technologies achieved such a feat, and mark a return to the company's historical habit of almost always producing more cash profit than it reports as net income.
What does all this work out to, valuation-wise? Well, the concept of adjusted earnings is a bit fuzzy, as it's never 100% clear what a company is "adjusting" before spitting out its final number. That said, $6.60 in earnings (using the high range of earnings projections) seems to imply about a 13 current-year P/E on United Technologies stock, and a 13 price-to-free cash flow ratio as well.
Meanwhile, analysts currently forecast better than 10% long-term earnings growth at United Technologies. Add in a generous 3% dividend yield, and "13 times earnings" looks to me like a fair price to pay for United Technologies stock.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 249 out of more than 75,000 rated members.
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