Course 408: Cyclical Stocks
How Is the Company Doing Now?
In this course
1 Introduction
2 How Is the Company Doing Now?
3 How Wildly Do Sales and Profits Fluctuate?
4 How Leveraged Is the Balance Sheet?
5 Does the Company Consistently Generate Positive Cash Flow?
6 How Steady Are the Company's Dividends over a Cycle?
7 Is the Firm Diversified Geographically and by Product Line?
8 Is the Long-Term Trend in Sales and Profits Upward?
9 How Has the Stock Performed?
10 How Expensive Is It?
11 How Expensive Is the Company Based on Normalized Earnings?
12 How Does the Price/Sales Ratio Compare with Historical Levels?
13 Conclusion: Get 'Em while They're Cold

Our first step is to identify where United Technologies is in its cycle. No one can predict exactly when a cyclical's earnings will peak or trough, but an examination of a company's financial statements can put us in the ballpark. At the end of 1999, United Technologies had been posting rapid earnings growth and high returns on capital--higher than the S&P 500 averages or the company's historical averages. (You can find this information in the Profitability section of the stock's Morningstar.com Report.) For a cyclical, lush profits suggest that peak earnings might not be too far off. United Technologies has historically never been able to sustain such stellar earnings. United Technologies' growth rates also suggest that the good times may be nearing an end. The firm has increased its sales for six straight years--about the average length of expansion for a cyclical--and its year-to-year growth rates have stayed fairly steady. The company's annual earnings growth, though, slowed from 24% in 1995 to about 18% in 1998 and 19% in 1999.

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