Wednesday, June 06, 2007

UTX: Primed for the Global Economy

Stocks have had a good run over the past 12 months, but our models, as I said last time, are showing that many blue chip stocks are still undervalued. During the next few weeks, I will show our Dividend Valuation Models for a handful of stocks in the Dow Jones 30 that appear to have a ways to go.

The first stock is United Technologies (UTX.) We own the stock in our Capital Builder and Cornerstone portfolios. UTX owns Carrier Heating and Air, Otis Elevator, UTC Fire and Security, and three aerospace units, Hamilton Sunstrand, Sikorsky, and Pratt and Whitney.

Please click to enlarge
The blue line on the chart shows that over the last 20 years, UTX, except for the period right at the turn of the century, has been a remarkably consistent grower.

The green bars represent the prices that our Dividend Valuation Model (DVM) calculated were the corresponding "fair values" of the stock in each given year.

What is important about the green valuation bars is that in 9 of the last 12 years they have come remarkably close to predicting the average annual price of UTX. When you stumble upon a valuation tool that has been as accurate as our DVM has for UTX, it might not be the worst idea to see what it is projecting for the next 12 months.

The model's valuation level for 2008, which is based on dividend growth and changes in interest rates, is $80 (green striped bars). The way our model works the $80 figure is a kind of central tendency, not an exact forecast.

With the stock currently selling at near $70, a move to near $80 would represent over a 14% increase. In addition, UTX's current dividend provides a 1.5% current yield. Totalling the capital appreciation and the dividend yield, we arrive at nearly a 15.5% projected total return in the coming 12 months.

But there is more: UTX is not a one year wonder, their product lines touch almost all of the macro trends that are driving the worldwide economy.

Carrier is deeply involved in cleaner and more fuel efficient heating and airconditioning. In addition, they are a prime benefactor of the global expansion. Otis Elevator is a key player in the global expansion with elevators, escalators, and moving sidewalks. UTC Fire and Safety is primarily a surveillance and security firm, think terrorism and safety. The aerospace division is full of technology used in defense and air travel. Think terrorism and global expansion.

On a daily basis stocks can bob and weave like a yo yo, but if you dig hard enough, some stocks are found to follow their fundamentals very closely. We believe UTX is one of them.

If you have not read our disclaimers recently, please click on the link at the right. The discussion here is for information purposes only. Yes, and I do own the stock.