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Playing down expectations
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January 28, 2002: 6:08 p.m. ET
Bush will be announcing big spending plans on Tuesday night, but analysts are still luke-warm on United Technologies. Plus: Sun Micro's not-so-fresh start.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - In his first State of the Union address Tuesday night, President Bush will focus on two unhappy themes: war and recession. Bush's proposals for combating both will include a lot of spending, with an overall budget increase of 9 percent over last year, and a whopping $48 billion for defense (already disclosed in a speech last week).
If he succeeds, the beneficiaries will be companies exposed to the defense sectors and the overall economy. An unpopular -- and therefore contrarian -- way to play this is with shares of United Technologies (UTX: up $1.32 to $67.72, Research, Estimates), a Dow component and one of the least-loved conglomerates on Wall Street.
United Technologies is better known by its brands: Carrier air-conditioning systems, Otis elevators, Pratt & Whitney jet engines and Sikorsky helicopters. The reasons United Technologies is unloved are primarily Carrier and Otis. These are meat-and-potatoes businesses that rise and fall with the economy. Slower housing starts and sluggish commercial building are bad for such products. The aerospace division is even worse shape because of the malaise in the U.S. airline business, bad before Sept. 11 and horrible afterwards.
So it is in that context that United Technologies surprised Wall Street earlier in the month by beating their expectations for the fourth quarter. The company produced free cash flow of $600 million on quarterly revenue of almost $7 billion. The aerospace segment had twice the operating margins (16 percent) that analysts expected. United Technologies is "inherently stable" says Christopher Mecray, an analyst with Deutsche Banc Alex. Brown in New York.
And yet Mecray, along with the rest of Wall Street, is unenthusiastic about United Technologies. Despite solid management and profitable businesses, investors will be afraid to invest until it's more obvious that an economic recovery is in progress.
And this is the opportunity. There's no suggestion here that United Technologies is a screaming buy. But at Monday's closing price of $67.72, its shares are worth about 15 times estimated 2002 earnings, a multiple similar to its projected 15 percent long-term growth rate. Its 80-cent annual dividend, for a current yield of 1.2 percent, provides additional downside protection for the risk-averse investor.
United Technologies is no one's idea of a glamour stock. But it does hold the opportunity for plucky performance, and therefore pleasant upside surprises.
Meanwhile, in Silicon Valley...
Banc of America Securities is hosting an aptly named technology-stock conference this week called, "A Fresh Start." That's a good example of the investment banker mindset: When trying to push stocks and drum up banking business, the cup always is half full.
At least one B of A analyst, however, shows that simply presenting the data sometimes tells a powerful -- and cautionary -- story. Analyst Joel Wagonfeld printed a one-page (front and back), laminated cheat sheet on the five most important companies he covers: Compaq, Dell, Hewlett-Packard, IBM and Sun.
He compares things like revenues, geographic mix, market share, balance sheets and valuations. The handy-dandy resource reveals some interesting comparisons, like Dell's ultra-low days sales outstanding (a measure of how quickly its customers pay up): 32.4 versus 49.2 for Compaq and 104.5 for IBM.
Most interesting is just how highly valued Sun is, relative to its peers, even at Monday's depressed closing price of $11. Sun trades for 327 times its estimated 2002 earnings, compared with a range of 22.5 times (IBM) and 38.4 times (Compaq) for the others. It's worth three times its estimated earnings growth rate, compared with a range of 1.5 to 2.1 for the others. And Sun is worth more on a price-sales basis, trading at 2.6 times trailing sales, versus 0.6 times for Compaq (the lowest multiple) and 2.2 times for IBM (the highest before Sun).
What's it's all mean? Perhaps it's not time yet for the "fresh start" in Sun's stock price.
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