When a multi-billion dollar company makes a multi-billion dollar bet on an industry, that bet better pay off. When that same company is one of the most well-known companies in the world, the risk is even bigger. This is why with United Technologies Corporation (NYSE:UTX) bet on the airline industry through their acquisition of Goodrich and existing Pratt & Whitney business, the company is betting big. If this bet pays off, shareholders will benefit greatly; if this doesn’t pay off, billions of dollars could be wasted.
Everyone Wants a Piece of This Pie
It shouldn’t be a shock that the airline industry is expected to grow significantly over the next few years. Airlines struggled tremendously during the Great Recession, and companies decided to wait on heavy investments. Now that the economy is on the mend and airlines are investing in a more efficient fleet, The Boeing Company (NYSE:BA) would seem to be the obvious choice for investors.
While it’s true that Boeing should do well in the next several years, the company hasn’t exactly been generous in rewarding shareholders. Though the company generated roughly $9.9 billion in free cash flow over the last three years, only about $3.8 billion was spent on share repurchases, and the company actually issued shares on a net basis.
With all of these solid choices available to investors, choosing the right one requires some digging into each company’s recent results and financials. While all of these companies might offer some positives for investors, there are at least four reasons to believe that United Technologies Corporation (NYSE:UTX) could be the best investment of the group.
Strength Upon Strength
When researching United Technologies Corporation (NYSE:UTX), I realized that the company not only should be positioned for strong growth, but they are delivering on this potential as well. One of the first ways investors might measure United Technologies’ potential is by looking at what analysts expect from earnings growth.
Over the next few years, the average analyst expects earnings growth of 13.5%, which is second only to The Boeing Company (NYSE:BA) at 13.9%. By comparison, Johnson Controls, Inc. (NYSE:JCI)’ EPS growth is expected to come in at 11.73%, and General Electric Company (NYSE:GE) is expected to grow by 10.87%. Considering that United Technologies Corporation (NYSE:UTX) has a diversified business and is expected to grow earnings almost as quickly as the more focused Boeing, this is pretty impressive.
The second area of strength for the company is that they are exhibiting strong revenue growth in both the Pratt & Whitney and UTC Aerospace Systems businesses. With Pratt & Whitney showing revenue growth of 11.48% and UTC Aerospace posting triple-digit revenue growth, it just shows that United Technologies Corporation (NYSE:UTX) is taking advantage of the growth in the airline and aerospace industry.
A third reason for investors to consider United Tech is that the company carries a strong operating margin. This shows that the company either has good pricing power, good expense controls, or both. In fact, of the group the only company with a stronger operating margin is General Electric Company (NYSE:GE) at 19.27%. United Technologies comes in second at 13.93%, which easily beats The Boeing Company (NYSE:BA) at 8.09% and Johnson Controls, Inc. (NYSE:JCI) at 3%.
The fourth reason United Technologies Corporation (NYSE:UTX) should be on every investor’s Watchlist is that the company’s growth in earnings and cash flow is even more impressive when you consider their low payout ratio. Of their peers, United Technologies actually has the lowest core free cash flow (net income + depreciation – capital expenditures) payout ratio.
In the current quarter, United Tech. paid 30.98% of their free cash flow in dividends. By comparison, The Boeing Company (NYSE:BA) paid 36.19%, Johnson Controls, Inc. (NYSE:JCI)’ payout ratio was actually 146%, and General Electric Company (NYSE:GE) paid out 90.42%. When you realize that United Tech is growing fast, generating cash flow, and has the lowest payout ratio, there is a lot of potential for investors to benefit as these trends continue.
A Combination That Is Hard to Beat
If you look at United Technologies Corporation (NYSE:UTX) overall, the investment case is pretty hard to contest. The company has the second fastest expected earnings growth of the group. As proof that the company should turn earnings growth into cash flow, the company’s strong operating cash flow growth just proves that management knows how to generate cash to reward shareholders.
When you combine United Technologies Corporation (NYSE:UTX)’ strong potential, good cash flow, and low payout ratio, the stock already looks like a good value. Combining these positive traits with a stock that trades for a P/E of about 15, which is similar to its peers, the stock looks even better. This company’s future is up in the air, and that’s actually a good thing.
Chad Henage owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company.
The article This Company’s Future Is up in the Air originally appeared on Fool.com.
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