United Technologies: Not Another GE

They're both enormous industrial conglomerates. They're both headquartered in Connecticut, one in Fairfield and the other in downtown Hartford, about an hour away up Route 15. And they're both members of the Dow Jones industrial average.

One reported shockingly disappointing first-quarter earnings a few days ago, sending the market into a tailspin. And that's where we think the similarities end between General Electric and United Technologies.

United Technologies reports earnings before the market opens on April 17, and thankfully, disappointing shocks aren't likely. After all, five cents of GE's seven-cent-per share earnings miss came from the dismal performance of its financial-services business -- and United Technologies isn't in that business, or in GE's beleaguered medical-equipment and home-appliance businesses, either.

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In fact, as the market was hammering GE stock -- and by association, United Technologies shares -- United chairman George David told Reuters that the company is "quite comfortable" with the earnings guidance it gave investors in February. He indicated that the company was on target to produce full-year profits of $4.65 to $4.85 a share.

But for now, the focus is on United's first quarter. Analysts expect earnings per share of $1.01, up 23% from the first quarter of '07. "It would not surprise me if they came in above consensus," says Oppenheimer analyst Myles Walton. Shares in United Technologies (symbol UTX) closed at $70.84 on April 15, up 1.2% for the day.

If the bulls are right about earnings, United Technologies could attract some of GE's disappointed shareholders. Says Walton: "If you are looking for a global infrastructure play, those who were thinking GE was it are likely to look elsewhere. And United Technologies will certainly fit that bill."

What is UTX doing right that GE got so wrong?

For a conglomerate, of course, it's all about the right mix of businesses, the management of each of them separately and of all of them as a whole. United Technologies has six divisions, including brands recognized the world over. Among them are Otis (elevators, accounting for roughly 22% of sales and 30% of operating profits), Carrier (heating, ventilation, air conditioning; 28% of sales, 20% of profits) and Pratt & Whitney (aircraft engines, 23% of sales, 29% of profits.)

You can think of the company, a member of the Kiplinger Green 25, as operating in two major fields: building infrastructure (Otis, Carrier and United Technologies Fire and Security) and defense and aerospace (Pratt & Whitney, Sikorsky helicopters and Hamilton Sundstrand, which produces electronic controls.) The company generates 60% of sales, expected to reach $59 billion in 2008, from markets in which it is the number one or number two player.

It's a solid mix, and United Technologies has a knack for managing it with an eye toward improving productivity to plump up profit margins. That has shown in the performance of United's shares. While GE's stock price has climbed just 29% from where it was five years ago, United Technologies is up 140% (Standard & Poor's 500-stock index is up 50%).

Not that United Technologies isn't facing some daunting challenges.

For starters, there's a brand new chief executive officer. Louis Chenevert took over from George David effective April 9. And while Chenevert, the former head of Pratt & Whitney is an insider, he'll be under scrutiny as he navigates this industrial ocean liner through some menacing economic cross-currents.

Plus, he's got a potentially hostile takeover to reckon with, namely United Technologies's unsolicited March bid for Diebold, which makes ATMs and security products. Still, a deep managerial bench at the division level should help the transition at the top.

Another worry is whether the whole infrastructure theme is close to being played out. That's the rationale behind a downgrading of the whole industrial group by Morgan Stanley analysts.

"We believe GE's earnings miss has significant negative implications for the broader industrials group," says a note to clients. "For infrastructure, high commodity costs, tighter lending standards, weak global equity markets and lower government tax receipts are now threatening projects."

Valid concerns, of course. But a sweet saving grace for United Technologies is that 45% of its sales come from what's known as the aftermarket -- servicing and repairing its products over the long haul, rather than just installing them anew.

For example, Otis captures about 80% of the elevators they install as an aftermarket income stream, with 55% of the division's sales coming from the aftermarket.

Commodity prices are indeed squeezing United Technologies' margins. But with more than 60% of the company's sales coming from overseas, a favorable exchange rate more than makes up for the shortfall.

Deutsche Bank analyst Nigel Coe estimates that higher commodity prices could subtract a maximum of $150 million from first-quarter earnings (before interest and taxes) while the effect of a weaker dollar boosting overseas revenues could add close to $300 million.

The company's Carrier unit is definitely feeling the pinch in residential housing. But only $2.5 billion out of nearly $15 billion in annual sales comes from the weakest residential markets, which is more than offset by U.S. commercial and global HVAC Carrier profits, says Oppenheimer's Walton.

The weakest link when the company reports earnings later this week will likely be within the Pratt & Whitney segment. That's something GE telegraphed when it reported a drop in revenue growth for its commercial aerospace aftermarket business.

Pratt & Whitney is expected to report lower profit margins because of a flat aftermarket business and higher research and developments costs for a new engine design (the Geared Turbofan, for any Gear Heads out there).

So is United Technologies a good deal for investors? From its peak of $81 a share last October, the stock is down 12%. Over the next 12 months, analysts see the stock trading anywhere from $78 to $87, for an estimated gain from current levels of 10% to 22%.

At roughly 14 times estimated 2008 profits, the stock's price-earnings ratio is about in line with the industrial group as a whole and with the market overall. Historically, that's been a rewarding time to buy the shares.

Moreover, long-term investors shouldn't have any regrets buying here, given that earnings are expected to grow at an annualized rate in the low teens over the next five years. But even among supporters, there's a lack of table-pounding urgency. And you'll get a lot more information in the next few days on which to base a decision.