Company Profile
United Technologies provides high-technology products to the aeros.p.a.ce and building systems industries throughout the world. Its subsidiary companies are industry leaders and include: Pratt & WhitneyLarge and small commercial and military jet engines, spare parts and product support, specialized engine maintenance and overhaul and repair services for airlines, air forces, and corporate fleets; rocket engines and s.p.a.ce propulsion systems; and industrial gas turbines.
UTC Fire and SecuritySecurity and fire protection systems; integration, installation, and servicing of intruder alarms, access control, and video surveillance; monitoring, response, and security personnel services; installation and servicing of fire detection and suppression systems.
Hamilton SundstrandAircraft electrical power generation and distribution systems; engine and flight controls; propulsion systems; environmental controls for aircraft, s.p.a.cecraft, and submarines; auxiliary power units; product support, maintenance, and repair services; s.p.a.ce life support systems; industrial products including mechanical power transmissions, compressors, metering devices, and fluid handling equipment.
SikorskyDesign and manufacture of military and commercial helicopters; fixed-wing reconnaissance aircraft; spare parts and maintenance services for helicopters and fixed-wing aircraft; and civil helicopter operations.
UTC PowerCombined heat, cooling, and power systems for commercial and industrial applications and fuel cell systems made by UTC Fuel Cells for commercial, transportation, and s.p.a.ce applications, including the U.S. s.p.a.ce shuttle program. This unit made headlines in early 2011 for a successful installation of a fuel cell unit to power a Stop & Shop store in Ma.s.sachusetts, paid for with a state grant but able to generate 90 percent of the store"s energy in house.
CarrierHeating, ventilating, and air conditioning (HVAC) equipment for commercial, industrial, and residential buildings; HVAC replacement parts and services; building controls; commercial, industrial, and transport refrigeration equipment.
OtisDesign and manufacture of elevators, escalators, moving walks, and shuttle systems, and related installation, maintenance, and repair services; modernization products and service for elevators and escalators.
Pratt &Whitney, Otis, and Carrier together accounted for almost 70 percent of revenues. Despite UTC"s strong presence in the national defense industry, about 46 percent of UTC"s revenue came from international customers, while U.S. government contracts accounted for 17 percent of revenues.
Financial Highlights, Fiscal Year 2010
After a 10 percent revenue drop and a 16 percent earnings drop in FY2009, the company bounced back nicely in FY2010. Sales came in at $54.3 billion, just under 5 percent ahead of FY2009. The real story was earningsan upturn in some of the more profitable and economically sensitive businesses like Pratt & Whitney, Otis, and Carrier improved margins and leverage, raising earnings to $4.74 a share, 10 percent ahead of FY2009. The recovery in the more sensitive businesses should continue, and the company has put out an FY2011 forecast of $56$57 billion in revenues and $5.05$5.35 per share in earnings, roughly the same growth rates experienced in FY2010.
The company returned 75 percent of free cash flow to shareholders in the form of $2.2 billion in share buybacks, reducing share count approximately 3 percent, and is likely to continue to reduce share count to around 925 million from a peak of 1,028 million in 2003.
Reasons to Buy
UTC is a cla.s.sic conglomerate play. The separate and loosely related or unrelated businesses buffer each other in line with what"s happening in the economy. During the recession, the defense and aeros.p.a.ce technology segments performed while business fell off in more economically sensitive businesses and products like jet engines and elevators; as the economy picks up, the sensitive businesses carry the load. That"s the way this sort of company works, and in the case of UTC, it has worked well. Unlike many of its compet.i.tors, United Technologies maintains a global presence, and UTX will be ready wherever the construction market begins to turn around first. The company"s brands, particularly Otis, are well known and very well supported worldwide. And like Honeywell, UTX has a broad portfolio of products geared toward improving energy efficiency, which will be a significant growth market for several years to come.
The company continues to deliver shareholder return through share buybacks and healthy dividend increases.
Reasons for Caution
The stability of the public sector portion of the business may become less so as Congress wrestles with the budget deficit. How many F-35 fighters or Sikorsky helicopters the company supplies or supplies parts to will get greater scrutiny. The rest of the business is still sensitive to construction, and construction may not be out of the woods yet. Finally, like all conglomerates, UTC is a very complex business to manage, and a slipup in one division, as with the problems on the A380 Airbus engines, can be damaging.
AGGRESSIVE GROWTH.
Valmont Industries
Ticker symbol: VMI (NYSE) S&P rating: BBB- Value Line financial strength rating: B++ Current yield: 0.7%
Company Profile
Valmont Industries was founded in 1946 as a supplier of irrigation products and became one of the cla.s.sic post-war industrial success stories, growing along with the need for increased farm output. They were early pioneers of the center-pivot irrigation systems, which enabled much of that growth and which now dominates the high-yield agricultural business. These machines remain a mainstay of its product line. But the company has expanded to make such familiar infrastructure items as light poles, cell phone towers, and those familiar high-tension electric towers that crisscross the landscape. Valmont products and product lines now include: Engineered Support StructuresPoles, towers, and other metal structures used in lighting, communications, traffic management, wireless phone carriers, and other utilities. Products are available as standard designs and engineered for custom applications as needed for industrial, commercial, and residential applications. If you"ve ever sat at a stop light and wondered how a single cantilevered arm could support four 400-lb. traffic signals, these are the folks to ask.
Utility Support StructuresThis segment produces the very large concrete and steel substations and electric transmission support towers used by electric utilities. This has been Valmont"s most profitable operation over the last few years, due mainly to increased volumes in a period of declining costs.
IrrigationValmont produces a wide range of equipment, including gravity and drip products, as well as its center-pivot designs, which can service up to 500 acres from a single machine. Valmont also sells its irrigation controllers to other manufacturers.
CoatingsDeveloped as an adjunct to its other metals product businesses, the coatings business now provides services such as galvanizing, electroplating, powder coating, and anodizing to industrial customers throughout the company"s operating areas.
In 2010, Valmont completed a $420 million acquisition of Delta plc, a maker of infrastructure products closely matching the Engineered Support Structures product line in the United Kingdom. The company has operations in Australia, New Zealand, the United States, China, South Africa, and throughout Southeast Asia. The clear strategy is to expand outside the United States.
Financial Highlights, Fiscal Year 2010
FY2010 turned out to be a surprisingly weak year for the company after a healthy FY2009. Valmont products tend to have long lead times, and in 2009, Valmont was working off backlog, especially in the utility segment. As FY2010 arrived, that backlog started to disappear, and reduced government spending after a b.u.mp related to the Obama administration stimulus program reduced demand and caused more compet.i.tive bidding and softer prices on the supply side. Costs related to the Delta plc acquisition hurt further. After earning $5.73 on $1.79 billion in sales in FY2009, FY2010 brought earnings of $4.00 on revenues of $1.85 billion. Guidance for FY2011 calls for a gradual recovery to $5.10 per share on $2.3 billion in revenues.
Reasons to Buy
Despite the relative turmoil in FY2010, we are sticking with this pick as a key infrastructure play. America"s infrastructure needs to be replaced, as does infrastructure in much of the developed world. And as for the less developed world, that infrastructure is needed in the first place. We think, long term, that Valmont is in the right place to capture a decent share of this replacement business, including electric utility infrastructure. The original irrigation business should also do well as agriculture and farm commodity prices strengthen. Valmont has retained market share and remains the leader among the four dominant U.S.based players in the large-scale irrigation market. The company"s continued emphasis on growth into new geographies should pay dividends as India and China begin to build infrastructure and adopt more modern agricultural methods. So far, Valmont has had very little penetration in those two countries.
Reasons for Caution
Many Valmont products are purchased by public sector and government agencies, and these agencies will be scrutinizing purchases to a greater degree than in the past. Escalating raw materials costs may also hurt, especially in a reduced demand, softer pricing environment that might ensue from contracting government purchases. Finally, we would like to see a little more shareholder return; dividends are small and share buybacks haven"t happened on a large scale; however, it should be noted that the company only has 26.4 million shares outstanding to begin with.
GROWTH AND INCOME.
Verizon Communications, Inc.
Ticker symbol: VZ (NYSE) S&P rating: A- Value Line financial strength rating: A+ Current yield: 5.3%
Company Profile
Verizon operates two telecommunications businesses: Domestic Wireless, which provides wireless voice and data services, and Wireline, which provides voice, broadband data and video, Internet access, long-distance, and other services, and which owns and operates a large global Internet Protocol network. The wireless business represents about 57 percent of the total; wireline is about 43 percent of the total by revenues.
The Wireline segment also supplies Verizon"s Fiber-to-the-Home (FiOS) broadband data infrastructure. One of Verizon"s largest investments, FiOS provides a very high bandwidth link to the Internet, easily surpa.s.sing DSL and even cable. Over this network, Verizon can provide hundreds of HD video stream, high-speed data, and voice all simultaneously. This service competes head to head with AT&T"s (a 100 Best Stock) U-verse and Comcast"s xfinity services among others.
The Domestic Wireless segment is served by Verizon Wireless, which is a joint venture between Verizon Communications, Inc., and Vodafone. Verizon Communications owns a 55 percent share in the business, and Vodafone 45 percent. Verizon wireless is now the largest wireless carrier in the United States. The wireless side of the business has been rolling out the new LTE Mobile Broadband network, a leading-edge 4G network designed to be ten times faster than the standard 3G network. Shortly after this December 2010 introduction, Verizon also began marketing Apple iPhone and iPad products and services for the first time in February 2010. Both rollouts have long been antic.i.p.ated and are thought to be going well, although there were initial reports of disappointment with the Apple rollout. Both introductions are very strategic for the company in its quest for technology leadership and its compet.i.tion with rival AT&T and others. Adding hardware products and wireless capacity hasn"t been the only growth strategy employed at Verizon. The company is actively seeking to become a player in the "cloud" computing phenomenon with a $1.4 billion acquisition of IT and cloud services provider Terremark Worldwide, and a small but interesting partnership with a company called eMeter, which markets devices to automatically read and transmit energy usage for utilities using Verizon"s wireless network. The company has also been making numerous smaller acquisitions in the traditional wireless segment to build its base.
Financial Highlights, Fiscal Year 2010
Verizon"s revenues grew 10.7 percent to $107.8 billion in FY2009, primarily due to the acquisition of Alltel and the inclusion of its revenues in the Wireless segment. FY2010 saw a slight revenue decline due to macroeconomic factors, compet.i.tion in the wireless s.p.a.ce, and a slow decline in traditional wireline business, with revenues of $106.6 billion. The slightly soft revenues and increased costs and capital spending for the FiOS rollout caused a slight softening in earnings, too, to $2.21 per share from $2.40 in the previous year. For FY2011, a mostly completed FiOS rollout and some cost-cutting measures including layoffs, and a new set of data plans tied to the 4G rollout are expected to create more upside, with the company calling for 48 percent top line growth and a.n.a.lysts estimating revenues at the $108.8 billion range and earnings holding steady at about $2.21. It should be noted that cash flows are much stronger than reported earnings figureswhile the company earned $2.25 in 2010, it reported cash flow of $7.60 per share. In part due to the strong cash flow, the dividend was increased slightly and the company recently approved a 100 million share buyback programabout 3 percent of total common shares outstanding.
Reasons to Buy
Verizon offers a nice combination of stability and income with a play in the growth of the "new economy" and supporting technology. Although recent price strength has dropped the effective yield to 5.3 percent, this still represents a solid income base for investors looking for steady to slightly growing income streams with a growth kicker. With the high dividend and share buybacks, the company seems to keep shareholder interests in mind. The brand is strong and its reputation hasn"t suffered some of the hits for poor quality service that archrival AT&T has experienced. Recent advertising campaigns pushing LTE and the Apple line have been effective, and aside from the Apple rollout, the company hasn"t taken its foot off the pedal with other technologies primarily based on the Android platform. Finally, we like the eMeter and other initiatives to maximize use of the network.
Reasons for Caution
The telecommunications business is very capital intensive, and Verizon, like others, is faced with larger and more frequent new technology rollouts like LTE and FiOS, and must spend heavily just to keep up with technology and compet.i.tion. While current cash flows are strong, this scenario doesn"t combine well with a business where compet.i.tion has cut into margins slightly and where dividend payouts have risen from 50 percent to 80 percent of earnings since 2002. Getting a solid return on new capital investments is thus critical, and one slipup could be costly for shareholders. The business environment is extremely compet.i.tive, and Verizon"s sheer size may hamper its flexibility to compete. Also, one should consider that Verizon shares ownership of the wireless business with Vodafone; the shared ownership could cause problems or result in an expensive buyout for Verizon.