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Recent cutbacks in U.S. government spending (the shutdown not withstanding) are generally considered to more likely hit businesses in the industrial goods sectors. Despite this, aerospace and defense has certainly not been immune to cuts in the last few years. However, it can be argued that the anticipated negative impacts have not been quite as damaging as previously thought. In addition to this, international defense spending, in some key markets, has been on the rise. The question is, will it be enough to drive revenue growth for the industry.

Industry Overview

Despite cutbacks in US government spending, the aerospace and defense industry continues to have a positive outlook for the year. Developing countries such as China and India have been showing signs of tremendous growth in their levels of military spending, which has been benefiting many companies within the industry. It should be noted that this isn't necessarily because A&D companies are selling into these countries. Rather, those countries' increasing levels of defense spending continue to drive domestic programs.

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The one year share price change for United Technologies (UTX) is better than many in the industry, currently standing at nearly 27%.

Growing and Sustainable Revenue

Revenue growth potential is huge for United Technologies as its helicopter subsidiary, Sikorsky Helicopter, recently won a $453 million award from the Pentagon to supply the Naval Air Systems command. Moreover, the company is expecting to grow more than 13% each year for the next five years generating most of its revenues from growth areas like China and India which contributed $12 billion and $17 billion to its revenues - outpacing even the United States.

Sustainable revenues would be locked in the event that the U.S confirms a full purchase of 2,443 F-35s from Lockheed Martin for a total of $391.2 billion. This will largely benefit UTX as the company manufactures the engines for the jet. Moreover, the US government's proposal also includes buying $2.2 billion worth of helicopters from United Technologies.

While these programs have huge upside potential for UTX, the company's global diversification is what makes it a stable, sustainable revenue driver. Growth areas like China, which is recently increasing its military expenditures as it embarks on territorial disputes in its nearby territories and within the Southeast Asia region, will continue to drive revenue growth.

Financial Ratios and Analysis

Revenue growth was at 15.97% in the first quarter of the year, beating the industry's average growth of 4.3%. EBITDA margin also rose by 2.56% in the first quarter relative to the same period last year.

However, UTX fell short in revenue growth and EBITDA margin in comparison to its rival Precision Castparts Corp. (PCP), which posted 25.5% revenue growth. The Boeing Company (BA), on the other hand, posted lower EBITDA margin of 10.10%, 33.6% lower than UTX's EBITDA margin.

Net income is at $1,266 million relative to $330 million of the same period last year, signifying a very strong growth of 283.63% for the company. This is also shown on its earnings per share which obtained a growth rate of 16% for the same period.

The debt to capital ratio is at .87 indicating fairly low debt, while the current ratio is sitting at 1.29 indicating capacity for the company to pay back its short-term liabilities using its short-term assets.

Return on assets is slightly lower as compared to 6.96% in the same period last year. Meanwhile, return on equity fell short at 18.79% versus its record of 22.39% in the same period of last year, indicating some issues in handling capital to generate profits.

Basic Valuation Metrics

The P/E ratio is currently at 14.15 which is at par relative to the diversified machinery's industry level of 17.73, indicating a modest price for the stock. On the other hand, PEG Ratio is at 1.19 versus the industry's 1.30, again supporting its modesty in price.

Price per Book is currently at 3.32 against the industrial good's average of 9.831 indicating that it is currently sold at a discount. While price to projected earnings ratio is at 13.35 relative to industry's average of 14.95.

Meanwhile, ROE is currently at 20.49% which is lower by 8.53% against the aerospace/defence industry's average of 22.4%.

Recommendation

I recommend buying United Technologies for various reasons. First, current net income growth was outstanding at 283.63% indicating strong revenue growth and superb management of its operating expenses. Second, reasonable debt along with its good current ratio indicates its ability to cover its short-term obligation. Lastly, strong stock performance is seen along with its increase in earnings per share growth indicating a relatively attractive valuation. On the downside, ROE is currently lower than the industry's average along with its poor quick ratio of .69, indicating that the company is exposed to potential problems in covering up its short-term needs using its most liquid assets. However, I strongly believe that these downsides are negated by its strong positive indicators, along with its solid revenue growth projections, making it a good long-term buy for investors.

Source: United Technologies: Soaring High On Superb Net Income Growth