United Technologies Corporation: overview of goods, services, and market position

¶ … United Technology Corporations in regard to its strategies, financial performance and general stock performance. The conglomerate's strategy and positioning is presented in regard to its various constituent firms. A conclusion is provided on the basis of the obtained financial outlook.

Financial performance and strategy

Capital markets considerations

UTC's financial and investor ratios

Price to Operating Profit (P/OP)

Price to Book Value (P/BV)

UTC's corporate strategy and positioning

United Technologies Corporation (UTC) is an American multinational conglomerate that has its headquarter in the United Technologies Building which is located in Hartford, Connecticut (UTC,2011).The company deals in research, development as well as manufacture of cutting-edge technology products in various areas such as aircraft engines, HVAC, fuel cells, helicopters, escalators and elevators, fire equipment, security, industrial products, and building materials among other products. The company is a major U.S. military contractor (Stewart, 2005, p.2) for which it produces missile systems as well as military helicopters (Matera, n.d).

UTC (2011) indicate that the company is diversified and deals in products such as; Carrier heating as well as air conditioning, Hamilton Sundstrand aerospace systems as well as industrial products, Otis elevators as well as escalators, Sikorsky helicopters, Pratt & Whitney aircraft engines, UTC Fire & Security Systems as well UTC Power fuel cells.

The operations of UTC are classified into 6 main business segments; UTC Fire and Security, Otis, Pratt & Whitney, Sikorsky and Hamilton Sundstrand (UTC, 2010) are collectively named o as "commercial businesses." Sikorsky, Hamilton Sundstrand and Pratt & Whitney are collectively known as the "aerospace business" (UTC,2010).

The commercial businesses are involved with the provision of goods and services to customers in the global residential and commercial industries. However, the carrier also deals with customers in transport refrigeration and commercial industries. The aerospace business on the other hand serves government as well as commercial aerospace customers in the original equipment as well as aftermarket parts and the services sectors (UTC,2010, p.27).

The main competitors are Boeing and General Electric (Yahoo!,2011)

Financial performance and strategy

In 2010 and 2009, close to 58% of the company's consolidated sales were from original equipment while 42% were derived from aftermarket parts as well as services (UTC,2010,p.27).These figures were 60% and 40% respectively in 2008.

As a global conglomerate, the company is affected by the political, economic and industrial factors at regional and global level. In order to limit the both the impact of a single industry or the economic conditions of any single nation on its consolidated operating outcomes/results, the company has employed a special strategy that is aimed at the maintenance of a balanced as well as a diversified business portfolio. The net sales made outside of the U.S. In dollars as an element (percentage) of the total sales is indicated below.

As part of UTC's growth strategy, the company has invested heavily in businesses that are located in certain countries that have a high levels of political, economic and currency risk (UTC,2010). These countries include Argentina, India, China, Brazil, Russia, and Mexico, South African as well as other countries located in the Middle Eastern region.

The conglomerate's 2010 annual report indicate that the net assets of the company in any of the countries listed above never exceeded 7% of the total consolidated shareholder equity (UTC,2010).

The global economy, after the 2008 and 2009 economic downturn had started to show signs of improvement in 2010.

The company in 20210 acquired GE security business at a cost of $1.8 billion that included an assumed debt of $32 million. It also acquired clippers a California-based public held company which manufactures wind turbines.

Bern (2011) indicated that the company is successful as a result of implementing an enhanced income strategy.

UTC employs the unrelated-diversification strategy coupled with an effective restructuring of the purchased assets in order to create various financial economies (Ireland et al., 2005, p.149).

For instance, sometime back in 1999, the company sold off its long-held division to Lear at a cost of $2.3 billion since its management concluded that the firm could not contribute any additional value through the restructuring the assets of the unit.

Weighted average cost of capital

ConnectCode (2007,p.1) defines Weighted Average Cost of Capital as the average cost of capital for a given company, when calculated as a weighted average of the costs of total equity and the costs of total debt. WACC therefore denotes the overall return that a given corporation should earn on both of its business operations and existing assets so as to increase or even maintain the state of the current value of the stock. For instance if UTC's WACC is 10% and the current stock price is $35, then the conglomerate must earn a 10% return on its current business operations as well as existing assets in order for it to maintain the price of its stock at $35.

UTC's WACC is estimated to be 11.72% by Cota (2011).A WACC of 11.72% means that UTC must earn a return of 11.72% on all of its business operations and assets so as to maintain the current stock price at $69.36 per share. If UTC wants to increase its stock price, then it must achieve a return rate which is higher that 11.72%.

Profitability over the past three years

In 2008, the company had a net income applicable to common shares of U.S.$4,689,000,In 2009 and 2010, this was 3,829,000 and 4,373,000 respectively.

Capital markets considerations

Capital markets considerations refer to the extent to which a given organization (firm) has access to the existing capital markets. It has a huge impact on the dividend policy. In any case given firm has easy access to the capital market, then it can successfully follow a dividend policy which is liberal in nature. If a given firm has a limited access to the capital markets, then it is most likely that it will adopt a rather low dividend payout ratio. Such firms have a heavy reliance on their retained earnings as their main source of financing their future growth. United Technology Corporation has an easy access to the capital markets since it is one of the largest conglomerates in the United States which enjoy state partnership in regard to its role as a major military contractor.

Dividends

A dividend policy of any firm is the choice of amount money that it will pay its shareholders, and the fashion used to do so. The most important aspect of the dividend policy of any company is whether to pay cash or use other modes of payment like the cheques. The other important aspect is the amount of the dividend to be paid out depending on the profits accrued. Another important aspect that is critical to the dividend policy is frequency that will be used to pay the dividends to the share holders. This policy can also encompass decision on whether the distribution should be based on share repurchase through specially designated dividends instead of the regular dividends. It also includes the aspect on whether to relay on stock or the cash distribution.

Most of the firms are reverting to the old non-traditional forms of paying dividends like share purchasing hence the dividend decision making process is much more complex than it was in the past. Also the different categories of shareholders need to be satisfied especially the institutional investors and the managers also have to take care of the individual stockholders.

This is a member of both the S&P 500 and Broad Dividend Achievers Index. In one decade, UTC has shown a steady growth both in earnings and dividends. Its strong balance sheet that has long-term debt free tendencies represents about one-fourth of its total capital as of December 2007. The most prominent risk that it faces in the future is the prolonged downturn in the Unites States of America's markets for residential housing, the slow growth of the commercial constructions for the market, inflation in the prices of commodities, as well as the reduction in the capacities of the airlines.

On the brighter side, UTC has managed to reap benefits from the strong demand for international infrastructure, the delays that has characterized the aerospace OEM and the weakening of the U.S. dollar. The strong cash flow that UTC boasts of could be used for repurchasing of shares and increases in dividends in the future. Its dividends policy that provides for the raising of the divided after every five quarters instead of the traditional four that is practiced by most companies, is also one of its outstanding strengths.

UTC's dividend is considerable safe (Dzombak,2011).

UTC's financial and investor ratios

The firm's financial ratio compared other company's gives grim picture of the other firms. It earning that is attributed to the sale of ordinary shares has surpassed the expectations of many pundits. In fact its weighted average prices of the ordinary shares have been on the rise in the London stock Exchange. This is then used to measure the average overall profit that has been generated from each share in existence for a specific period of time. This ratio is calculated by taking the earnings that the company has received from the ordinary shares then divides that figure by the weighted average of the ordinary shares that have been in issue during that financial year.

The Price Earning (P/E) ratio

This ratio is got from dividing the prices of the shares in the market by the earning received from the shares. At any given time this ratio gives the indication of how the market values the business is the rating that the market has given the business. The best context to view this ratio is to allow the sector or the market average to get the feel of the relative value of the stock or the prices of the stock in the market.

The Price Earning (P/E) ratio =

Market Value per Share

Earnings per Share (EPS)

Using the 2010 figures of;

Number of shares of common stock outstanding = 920,456,248

Net income attributable to common shareowners (in millions) = 4373

Earning per share = 4.73

Share price = 84.75

Then we find that;

P/E = 17.84

While the industry average P/E = 19.09

Dividend yield

This is got from dividing the latest dividend per share by the current market price of the share then multiplies the result by 100. This ratio is at time called the payout ratio since it provides the guidelines that a firm can follow to maintain the payment of the dividend. It also gives the measure of the proportion of the earnings that the business will retain instead of the earnings used to pay the dividends.

Price to Operating Profit (P/OP)

Number of shares of common stock outstanding = 920,456,248

Operating profit (in millions)= 7,186

Operating profit per share =7.81

Share price =84.75

United Technologies Corp. P/OP= 10.86 while

Industry P/OP= 13.35

Price to Sale (P/S)

Number of shares of common stock outstanding = 920,456,248

Net sales (in millions) =54,326

Sales per share =59.02

Share price = 84.75

United Technologies Corp. P/S =1.44

Industry P/S = 1.56

Price to Book Value (P/BV)

Total shareowners' equity (in millions) = 21,385

Book value per share (BVPS) = 23.23

Share price = 84.75

United Technologies Corp. P/BV ratio =3.65

Industry P/BV ratio = 3.15

Stability ratio

The concentration of the ratio is focused on the long-term health of the business especially the specific effect that the capital has on the business.

Interest cover

This interest that the business receives before the calculation of the operating profit is done. This cover helps one to measure the ability of the business to service payback the debts it owes out. It also gives the indication of whether the profits accrued by the business can be able interests as well as cover other financial costs.

Figure 1: Monthly stock price movement from October 4th 2008 to October 4th 2011.

Stock price volatility

The stock price Volatility is forecast to decline (fall) over the next month.

UTC's corporate strategy and positioning