To see how deep a cyclical United Technologies is, the best place to look is the firm's record in the last recession. It is not a record for the queasy. Many cyclicals can limp through a slump without losing money, but United Technologies belly-flopped in the early 1990s, losing more than $1 billion in 1991 and losing $287 million in 1992. Contrast that dismal performance with 1999's. United Technologies' return on equity (ROE) of 21% ranked in the top quarter of both the aerospace industry and the broader market, whereas its ROEs during the two recessionary years were negative. That's fluctuation. United Technology's profits are even more volatile than those of the average company in this very cyclical industry.
Why? A large chunk of United Technologies' sales depends on the capital-spending budgets of corporations and governments around the world. Because capital spending is especially sensitive to economic conditions, companies relying on it see extravolatile sales and earnings.
How Leveraged Is the Balance Sheet? >>