Analyst says United Technologies stock has fallen too far

Text size

United Technologies

stock was dragged down by the concern regarding his draft deal with
Raytheon
,
but Vertical research partners argues that pessimism has made stocks too cheap.

United Technologies (ticker: UTX) rose 0.8% to $ 125.76 early Friday afternoon,

The story back. United Technologies and Raytheon (RTN) unveiled their consolidation proposal earlier this week. While the latter's actions initially increased on the news, worries soon became apparent, particularly on the part of Barron.

We warned that the deal could be too focused on financial engineering, rather than on fundamental synergies and cost savings. Barron Also pointed out a strange aspect of the transaction: the shareholders of Raytheon will be paid with the shares of United Technologies, after the passage of two previously announced splits, which makes the transaction difficult to evaluate.

Despite the decline this week, United Technologies shares are still up almost 18% since the beginning of 2019.

What's up. Friday, vertical research analyst Jeffrey Sprague has strengthened its rating on United Technologies in the purchase of hold, although it has reduced its price target from $ 5, to $ 145. "The market reacted to the merger proposed by United Technologies with Raytheon with a collective thumb," pushing the shares, "which were already arguably cheap on the basis of the sum of the coins," he added.

He notes that there are many concerns, from the already complex nature of the company to the fear that management is focusing too much on "building the empire," while the shareholders of Raytheon have their own problems, the price to the dilution of Raytheon's status. play at the defense company.

"Although we understand all these points, and they have some merit, we believe they are now fully in the stock and that United Technologies shares are attractively valued," Sprague wrote. (His colleague still has a note on Raytheon.)

Look to the front. The boards of directors of both companies have already approved the agreement. Sprague thinks that he will go ahead, despite the reaction of the actions. And it's not necessarily a bad thing. Assuming modest growth in 2020 and some cost synergies, the new company's earnings could rise enough to give it a price / earnings ratio that is less than 10 times higher than that of its peers, he said.

Shareholders may reject the merger, although Sprague says it's more likely that opponents are selling now rather than waiting to vote. He says that even if the combination does not occur, United Technologies is too cheap to ignore at current levels.

Write to Teresa Rivas at [email protected]