United Technologies (UTXFree United Technologies Stock Report) dates back to The United Aircraft & Transportation Corporation, which was formed in 1929. The company combined an aircraft engine and airframe manufacturer and an airline business. In 1934, however, the U.S. government concluded that such large holding companies as United Aircraft & Transport were anti-competitive, and new antitrust laws were passed forbidding airframe or engine manufacturers from having interests in airlines. As a result, United Aircraft & Transport broke up into three separate companies. Its manufacturing interests east of the Mississippi RiverUsing the VL Page_Analyst Comment (Pratt & Whitney, Sikorsky, Vought, and Hamilton Standard) were reorganized as United Aircraft.

The company was largely successful over the next four decades, which included World War II and its associated military buildup. An undue reliance on military business, however, led the company to make, perhaps, its biggest change in 1975 when it became United Technologies. The name change was a reflection of the company’s intention to diversify into numerous fields beyond aerospace. Almost immediately, the newly named company went on a buying spree, merging with smaller companies or forcibly taking them over. The company’s success since this transformation has been, for the most part, impressive. 

Using the VL Page_Quarterly EPS BoxToday, United Technologies is still making big changes. As Erik Manning notes in the Analyst Commentary, the company’s portfolio has “a lot of moving parts these days.” This is because of its pending purchase of Goodrich, a maker of guided missiles, and its subsequent decision to buy Rolls-Royce out of a joint venture. These changes, specifically the Goodrich acquisition, will require United Technologies to divest assets. All of the additions and subtractions are likely to leave 2012 earnings flat at best, a fact highlighted by Manning’s 2012Using the VL Page_Historical Array estimate of $5.50 per share, shown in bold in both the Statistical Array and in the Quarterly Earnings box. 

Clearly acquisitions are a big issue that can divert management attention. So, too, can divestitures. Failed mergers and acquisitions dot the business highway and always have, as companies bite off more than they can chew or expand into businesses they just don’t understand well enough to successfully run. So it is understandable that the market is showing concern about the changes afoot at United Technologies.

However, it is important to note that United Technologies is a conglomerate that, effectively, has been buying and selling businesses since its founding in 1929. Moreover, it has a pretty good track record of success. The fact that the shares have lagged the broader market, as seen by the below market total returns for the trailing one- and three-year periods (shown in the Total Returns box at the bottom right of the Graph), and the downward slope of its relative strength lineUsing the VL Page_Graph (the dotted line at the bottom of the Graph), may present investors with a buying opportunity.

The market is voicing its concerns through action, leading to a languishing stock price. This has pushed the yield on the stock toward 3% (the recent yield can be found in the Top Label section that runs across the top of every Value Line report). This is the high end of its historical range, as can be seen by scanning the historical values for average annual dividend yield in the Statistical Array. In fact, looking back to the recessionary years between 2007 and 2009, the current yield suggests similar pricing to those seen in the depths of the recession—even though earnings are well above the $4.12 earned in 2009. The relative P/E is in line with levels seen in recent years, too.

This pricing, however, is for a company that Manning believes will post revenue growth of 8.5% on an annualized basis over the next three to five years. Using the VL Page_Capital StructureEarnings are projected to grow at an even faster annualized rate, 10%, with dividends posting 9.5% yearly gains. So while 2012 might show little to no growth in earnings, that appears to be a function of the company gearing up for the future—where earnings are projected to reach $8.60 a share out three to five years.

The larger a company gets, the harder it is to sustain high levels of growth. So, for a $68 billion market cap company (found in the Capital Structure box), these are impressive numbers. Moreover, they lead to a Target Price Range of between $115 and $140 per share for the 2015-2017 period. Including dividends, that price range translates into annualized total returns of between 14% and 19% (these figures can be found in the Projections box). This would be a fairly impressive performance for a company with a Safety Rank of 1 (Highest), which is found in the Ranks box.

Momentum investors will probably want to avoid United Technologies, as Value Line’s Timeliness Ranking system pegs it to just track the market over the next six to 12 months. However, most others would do well to consider adding this industrial giant as a core holding. This is particularly true for investors seeking a material and growing dividend stream.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.