The reason cyclicals such as DuPont DD and Emerson Electric EMR can post rising earnings even in a recession is that they are diversified: Not all the cyclical businesses in their portfolios move in sync. United Technologies is diversified by product line, but all its businesses (aerospace equipment, heating and air-conditioning, and elevators) are both cyclical and dependent on the same economic factors. Of course, that's not so bad, even if it does spawn big swings in earnings. Cyclicals constantly face the temptation to diversify into new businesses to reduce risk, but their records at such diversification are often horrendous. They are generally best off sticking with what they know.
A more appealing type of diversification is geographic, and United Technologies does better in that regard. About 40% of the company's revenues come from outside the United States. This diversification not only gives the company some cushion when the U.S. economy turns sour but it also means United Technologies has exposure to developing parts of the world, which are growing much more rapidly than the U.S.
Is the Long-Term Trend in Sales and Profits Upward? >>