Industrial conglomerate United Technologies (NYSE:UTX) reported third-quarter results last week that beat analyst projections as sales and profits continue to recover from the credit crisis. The stock has now nearly doubled since the height of the credit crisis in early 2009 and stands right at its 52-week high, both of which suggest the valuation is starting to look a bit rich given the still tepid outlook for the global economy.

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Third-Quarter Sales Review
Sales improved a modest 1% and reached $13.5 billion. United Tech operates six primary business segments and saw more robust top-line growth in the Fire & Security alarm and surveillance segment and Hamilton Sundstrand aerospace unit that competes with the likes of Boeing (NYSE:BA). Otis elevators, Carrier HVAC and refrigeration, and Sikorsky helicopters, which competes with Textron's (NYSE:TXT) Bell helicopter unit, each saw slight sales declines.

Profit Recap and Outlook
Segment operating profit jumped 13.8% to $2.2 billion, or a very healthy 16.3% of sales. Subtracting out corporate expenses and related eliminations, consolidated operating income reached over $2 billion, or 10.1% ahead of last year's levels. Notable profit improvements came from the Pratt & Whitney engine unit as well as Otis, Carrier and Fire & Security. The Otis unit is the most profitable by far and logged a 23.7% operating margin during the quarter.

Growth in net income was almost as robust, but slightly higher interest expense and income tax expense slightly tempered it to 13.2%. The bottom line reached $1.2 billion, or $1.30 per diluted share.

For the full year, analysts expect 2010 sales of $54 billion and earnings per share of $4.72; these figures are forecasted to increase to $57 billion and $5.29 respectively.

Bottom Line
Based off the current share price and analysts' expectations, the forward P/E is just under 16. This is toward the high end of United Tech's five-year range of eight to 21. The multiple will be slightly lower on a free cash flow basis, but is still pretty rich considering the prospects for a global economic recovery are still uncertain.

Though not directly comparable to United Technologies given its diversified industrial sales base and geographical breadth, a handful of aerospace firms that also have sizeable defense industry exposure trade at much lower valuations. For example, Raytheon (NYSE:RTN) and L-3 Communications (NYSE:LLL) trade at less than 10 times forward earnings, and though there are concerns about government-related defense spending, the low earnings multiples leave better potential for share price upside and will benefit from improving aerospace spending. (Find out how the everyday items you use can affect your investments. See Commodities That Move The Markets.)

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Tickers in this Article: UTX, BA, TXT, RTN, LMT

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