- Quick Take
- UTC’s Goodrich and International Aero Engine (IAE) acquisitions of 2012 have positioned it well to benefit from the long-term growth anticipated in the commercial aviation industry.
- In the near term, integrated product offerings and synergies from the Goodrich acquisition will add to UTC’s aerospace growth.
- At the same time, UTC’s Geared Turbofan engine series PurePower PW1000G is expected to drive up engine shipment volumes at Pratt & Whitney.
United Technologies (NYSE:UTX) transformed its aerospace business last year through multiple acquisitions and divestitures to take advantage of the growing global commercial aviation industry. The company acquired the aerospace parts manufacturer, Goodrich, for over $18 billion to gain a leadership position in the aerospace supply chain. Integrated product offerings resulting from this acquisition have provided United Technologies [UTC] with a significant competitive advantage against other major aerospace parts manufacturers like General Electric (NYSE:GE) and Honeywell. Further, synergies from this acquisition will add to UTC’s profit growth over the next few years.
At the same time, some of the company’s other programs, most notably the Geared Turbofan PurePower aircraft engine is gaining traction and is expected to drive up engine shipment volumes at Pratt & Whitney. UTC is poised to grow its earnings at strong rates over the next few years on demand from the global commercial aviation industry.
Together, Aerospace Systems (which incorporates UTC’s aerospace component business) and Pratt & Whitney (which incorporates UTC’s aircraft engine business) constituted nearly 40% of the $57.7 billion revenues of UTC in 2012 [UTC’s 2012 10-K, February 7 2013, www.utc.com]. We currently have a stock price estimate of $110 for UTC, around 15% ahead of its current market price.
Demand From Commercial Aviation Will Drive Up UTC’s Earnings
Global air passenger traffic has grown at strong rates over the past few years and it is expected to continue to grow at such rates in the next decade driven by increasing demand for air travel from the emerging economies. At the same time, airlines have seen their profits rise on higher passenger traffic. As a result, airlines across developed and developing countries have placed large orders for airplanes, increasing the order backlog of aircraft manufacturers. This has forced aircraft manufacturers like Boeing (NYSE:BA), Airbus and others to hike their commercial aircraft production rates, which in turn has increased the demand for aircraft components and parts supplied by UTC.
Integrated Offerings And Synergies From The Goodrich Acquisition Will Aid Growth
After the Goodrich acquisition, UTC offers the broadest portfolio of aerospace components among all suppliers to original equipment manufacturers (OEMs) and the aftermarket. Apart from cross selling opportunities that arise from this expanded product portfolio, UTC has gained a significant competitive advantage vis-a-vis other component suppliers, as it can now integrate products from Goodrich, Pratt & Whitney and its prior owned component business, to create compelling offerings. This was highlighted earlier this year in UTC’s win to provide the entire propulsion system, including aircraft engine, nacelles and controls to Embraer’s second-generation of E-jets, beating GE, which provides engines to the current generation of E-jets. UTC was also selected by Embraer to supply wheels and brakes, auxiliary power units (APU) and electric systems to its next generation of E-jets, which are scheduled for entry in 2018. (See Pratt & Whitney Increases Market Penetration With Addition of Embraer E-Jets)
UTC also gained $63 million in synergies in 2012 from the Goodrich acquisition through procurement savings, facility consolidations and headcount reductions. The company anticipates to realize $200 million in synergies from this acquisition in 2013 and achieve the entire run rate of $500 million in Goodrich synergies by 2016 [UTC’s Aerospace Systems presentation on the annual investor day meet, March 14 2013, www.utc.com].
Geared Turbofan Engine Will Raise Pratt & Whitney’s Sales Volume
UTC’s Geared Turbofan [GTF] engine series, PurePower PW1000G, which offers 10-15% improved fuel efficiency compared to today’s regional and single-aisle aircraft engines, will also drive a significant portion of the company’s growth. This engine employs a gear which rotates the front jet engine fan at slower speeds compared to the turbine shaft. This improves thrust without burning additional fuel and lowers noise and carbon emissions.
Currently, UTC’s GTF engine has been selected as the exclusive engine for Mitsubishi Regional Jet, Bombardier CSeries and Embraer’s second generation of E-jets, and as an engine option for the Airbus A320neo and the Russian Irkut MC-21. Through 2012, this engine series had garnered over 3,500 orders (including options) [UTC’s Pratt & Whitney presentation on the annual investor day meet, March 14 2013, www.utc.com]. Deliveries against these orders will aid growth in Pratt & Whitney’s engine shipment volumes over the coming years.
Government Austerity Could Impact Military Aerospace Sales
UTC generated around three-fourth of its overall aerospace sales from the commercial aviation markets and the remaining from defense and space markets [UTC’s propulsion and aerospace systems presentation on the annual investor day meet, March 14 2013, www.utc.com]. In the latter, the company is facing pressure from defense spending cuts implemented by governments in the U.S., U.K and other European nations. Having said this, even in this market, UTC is well positioned with supply contracts to several major defense programs like the F-35 Joint Strike Fighter, Boeing’s KC-46A tanker and Airbus’ A400M military aircraft, which are less likely to face cuts.
In 2013, UTC anticipates Pratt & Whitney’s sales to rise in mid-to-high single digit percentage range and UTC Aerospace Systems sales to lie between $13.5 billion and $14 billion, up from $8.3 billion in 2012, due to incorporation of full year sales of Goodrich [UTC’s propulsion and aerospace systems presentation on the annual investor day meet, March 14 2013, www.utc.com]. In the long term, we anticipate UTC’s aerospace sales and profits to rise significantly, driven by increased demand from the commercial aviation markets worldwide.
Disclosure: No positions