Hey YouTube.
I'm Jimmy and this video I'm going to walk through
my analysis of United Technology
ticker symbol UTX.
This is the 25th video in our series
where we're analyzing all 30 stocks
in the Dow Jones Industrial Average.
You can see a link in the description below for all the
other videos.
Then we're going to take that analysis.
We're going to build three different portfolios
a value a dividend
and a growth portfolio.
OK so United Technologies a really interesting
company. And this is a really interesting time
to be researching UTX's
stock. Why.
Well UTX is about
to break up into three different companies.
So let's walk through the basics of the companies
as far as the breakup goes
and then we'll see if we should add UTX's
stock to any of our portfolios.
So the first of the three companies will keep the United
Technology name the new United Technology
will have the Collins aerospace business
and the Pratt
and Whitney business within it.
This will make United Technologies one
of the leading suppliers to the commercial
aerospace
and the defense industries.
The Pratt and Whitney segment makes
aircraft engines for commercial airplanes
and military planes
and they also offer some maintenance services.
Now they make a ton of different engines for planes
of all sizes commercial planes
fighter planes helicopters
and the list goes on
and on. And as of the end of
2018 this division has a
huge backlog of orders.
OK. Then there's the Collins aerospace
division that will be part of the new
United Technologies.
So UTX finalized
their acquisition of RockWell Collins
back in November of 2018.
In fact that was the same day that they
announced the breakup.
So basically Rockwell Collins provides technology
that goes into airplanes everything
from flight controls to heating
systems to lighting
and so on.
If it's technology that goes into an airplane
they probably make it.
So clearly we can see why
Rockwell Collins
and Pratt and Whitney end up together.
This seems like a good combo as far
as when they are in their own independent
business.
OK. Next up for UTX
is the Otis business
Otis is the largest manufacturer of escalators
and elevators in the world.
So Otis designs sells
installs
and services passenger
and freight elevators.
They have almost 13 billion dollars in revenue
back in 2018
but will come back to the numbers when we try to
come up with a fair value for the business.
Then the final company is carrier.
So Carrier does heating air conditioning
refrigeration Fire Security
building automation things like that.
They do it for commercial properties.
Government properties infrastructure projects
and some residential properties.
Now this business is largely
driven by the economy.
And as you can imagine if the economy
slows then building will likely
slow and this business will get hurt
and even the Otis company is largely driven
by the economy.
So they're likely to be slightly slower growth
companies.
OK. So now we know the basics of each segment
and we know that United Technologies going
to break up.
Is this a good thing
and should we buy it now.
Well based on my research it seems to be
a good thing for UTX stock.
So generally big conglomerates
like United Technologies trade at discount
to their true value.
In fact they call it a conglomerate discount.
The theory behind a conglomerate discount
is that in this case United Technologies
can't be as effective in many different
business lines as it could be if it just focused
on one.
It's sort of like saying that they'd be the jack
of all trades but the master of none.
Now many of us know that
one theory is that the larger
company gets well the more economies
of scale they get the better their pricing
when they go to their customers
or their consumers go to their suppliers.
But for some reason the
stock market doesn't typically
price conglomerates
in that way.
Usually there's a conglomerate discount.
So breaking up a company
could add value for the shareholders.
So what does this mean for UTX stock.
Well in theory Break it up in the
individual parts could be worth more
than the whole company is right now.
So let's see if we think this is true.
Now I think that we should focus on
how each of the companies will be positioned
once they spin off.
So all indications are that the new
UTX which is essentially
a pure play aerospace supplier
well it should be poised for fantastic
growth.
They're talking low double digit growth
with great margins.
So I would expect them to be an industry leader
when they're on their own
and Otis is expected to be an industry
leader in their business.
And they the rumors are that they're going
to have a decent amount of cash which will help
them make some acquisitions
and grow that business.
Now like I mentioned before this
business is likely to be
a lower growth business relative
to the new UTX
and the same is true for the carrier company.
So the carrier company is in a highly
segmented business.
So if they end up with a decent on cash
they could also use acquisitions to fuel their
growth.
Okay. So now how do we value the business.
Well the ideal way is to try to.
To use the sum of the parts valuation
method. This is ideal because
they're going to breaking the company up.
Typically we would only use a sum
of the parts technique if we
think that a breakup is going to happen
or if perhaps you were analyzing the company for
takeover
and hypothetically we thought that we needed to
value each segment to see I would add to
our business.
Either way let's see what we come up
with as far as what their current value is.
So I was curious what the market thought of the break upon
was first announced.
So this is a chart of UTX's
stock going back one year
and right around here is when they announced the breakup.
So we can see that
the stock began to fall.
And one of the reasons I think it fell
so much early on is that there
wasn't a ton of information out there
as to how they were going to break it
up. You know what.
Different segments were
but there were concerns about where the free cash
flow would go. Who would get the debt.
Who would get the cash.
There were some question marks.
Now don't forget the acquisition
of Rockland Collins was announced right at
the same time.
And then we see the stock begin to bounce back.
Perhaps people were able to start sorting
out what would happen
with the future the business would look like for
each of the divisions
and then it looked like good value at
110 or even 105.
So now this brings us to valuing UTX
stock using our sum of the parts
technique so to effectively
do this we essentially need to value
what each segment is going to be worth.
So it seems that enterprise value
to our earnings before interest taxes depreciation
amortization
or EBITDA is the best valuation
technique to use mostly because
UTX gives us EBITDA for
each of the businesses.
So we can use that project out
a year and find some competitors for
each division to see what multiple
we want to use.
Okay. So for Otis
there are four main elevator providers.
Now the tricky part is that each of these are based
all over the world which is a good
thing because most of Otis his business
is international.
But we have to convert those
to what would be fair for our EBITDA numbers.
Now it seems that if we use 14x
based on 2019
EBITDA that would be reasonable.
Okay. So we we can add these up in a moment
for now was just jumped the carrier
with carrier.
Well they're a bit more of a segmented industry
compared to Otis
but from what I can find
it seems at 14x is also
a fair multiple to use for this business.
Now these two numbers being
similar to each other doesn't really surprise
me since they're both vulnerable
to the same macroeconomic environments.
So I'm okay
with using a 14x for both of these
businesses.
Well then we come to the new UTX
which is their aerospace business.
Well this business is growing at a much faster rate
and with the acquisition of Rockland Collins
Well this really helps round out the
offerings of the company for UTX
it seems that a fair
multiple to use on 2019
EBITDA projections is about 17x.
Now I actually struggled a bit
with which multiple I should use.
So what I did.
And if you're ever not sure what multiples to use perhaps
this would work for you as well.
Well what I did is I found two analyst reports
that were projecting the breakup
and that one of them used a 14x
multiple. And then the other one used a 15x
multiple
but they were doing it on 2020
estimates.
So using 2020 actually
makes a lot of sense because this
breakup isn't supposed to officially
happen until 2020.
So I get why they would use 2020 numbers.
The reason I liked to use 2019
is that frankly 2019 numbers
are bit easier to predict.
The further we go out the tougher the prediction.
So if we do it our way
well we get better in theory we get better projections
but we sacrifice the reality
that the business won't yet be broken up.
Now the at the end of the day I'm not sure
it matters which one we use
and here's why.
So we're using 17x on 2019
numbers but they're using 14x
on 2020 numbers
but 2020 EBITDA is
going to be higher since we're going to two years to
grow it. So therefore they use a smaller
multiple.
Now this is what our numbers end up looking like.
So Otis looks like it could have an enterprise value
of almost 28 billion dollars
and that's simply the
1.992 Billion times
14 carrier comes
in at about forty four
and a half billion
and UTX comes in it up
a bit over one hundred billion dollars.
Now this gives us total
enterprise value of a bit over
one hundred and seventy five billion.
So if we were to compare this
and throw up the 2020 numbers
from analysts Well it looks
like that their enterprise value would
be about one hundred eighty five billion dollars
because they had higher EBITDA
but lower multiples.
So if we're ever going to compare
you ever we're going to look at analyst estimates
and analyst multiples we'll
make sure we pay attention to what year they're using
because that's important.
The further out you go the lower the multiple
has to get.
Now this formula isn't done just yet.
Right now we have enterprise value
but what we need to do is we need to find out what the stock
is worth so let's delete this one
and switch back to our 2019
projections.
Now the next thing we have to do is we have to
subtract debt
and this actually points out one of the reasons
why it's good to use enterprise value
to EBITDA because we don't know
where this debt is going to go which
is which business is going to end up
with the debt or how much of it is they don't end
up with whoever ends up
with it or part of it
or all of it. Well that's going to hurt
their profitability.
They'll make something like P/E very difficult
to predict at this point.
So doing our valuation like this
we can group it all together
and then subtract out at the end
then what we need to do is be to add back
cash. So when we do
all this math we could see that the
value of the equity turns out
to be about one hundred thirty six billion dollars.
Divide that by the number of shares outstanding
and we end up the fair value of the stock of
about one hundred fifty nine dollars.
Now since UTX is currently
trading at about one hundred twenty eight dollars
per share it seems that
there is some upside here based on
our calculations.
Now one risk to consider here is
that this breakup isn't going
to happen for more than
a year from now
and anytime we have
that huge lag between
when we would be investing versus when
the event we think that will create the value
is the longer that is the more
dangerous that becomes.
Because anything could happen we could have good
news we get a bad news we could have all sorts
of things come up that could disrupt
the way our calculations are currently working.
But what do you think based
on what's happening
with the company
and based on the types of portfolios we're trying
to build.
Where do you think you taxes stock falls
in our portfolios if any of them.
I think I can make a case for the value portfolio.
They also have a dividend although
I'm not sure how stable that dividend is
going to be when the breakup happens
or it gets closer I'm not sure how that's going to play out.
So think the dividend portfolio would be good for
us right now.
But my question for you is
do you think we should add UTX's stock
to any of our portfolios.
Let me know what you think in the comments below.
And thank you for sticking
with me all the way to the end of the video
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and I'll see in the next video.
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