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United Technologies' (UTX) Pratt and Whitney segment revenue decreased 5% year over year to $3.38 billion in the third quarter of fiscal year 2013. It is expected to overcome this decline by supplying engines to Bombardier's "CSeries" airplanes and Lockheed Martin's (LMT) fighter planes. Pratt and Whitney supplies engines to the CSeries airplanes developed by Bombardier. These engines use an advanced gear system, which improves fuel efficiency by 16% and reduces operating cost by 20%. With these benefits, we expect Pratt and Whitney will continue as a long-term engine supplier for CSeries.

The Pratt and Whitney segment is also expected to grow with the supply of engines to Lockheed's F - 35 planes, which we discussed in our previous article on United Technologies. Lockheed already has orders from Britain, Australia, Italy, Norway, Israel, and Japan for its F - 35 fighter jets. Additionally, Lockheed has orders for its F - 35 from the Pentagon. Under the current five-year plan, the Pentagon ordered around 42 F-35 airplanes, which it expects to deliver by fiscal year 2015. Lockheed's F-35 is expected to boost the company's aeronautics segment. The aeronautics segment's net sales declined in the third quarter of fiscal year 2013 by around 1.78% year over year to $3.63 billion. However, we believe that with the increase in orders of F - 35 planes, this declining trend of the aeronautics segment will reverse. The increase in the orders of F - 35 will in turn boost Pratt and Whitney, which provides engines for F - 35 planes.

Along with Pratt and Whitney, United Technologies' aerospace systems segment is also a supplier of multiple systems to Bombardier's CSeries. These include its electric power generation and distribution system. The aerospace systems segment also provides the engine control system and various other components to the CSeries. With the growth in the orders of CSeries airplanes, both the aerospace systems segment and Pratt and Whitney segment of United Technologies' will benefit. Bombardier announced on October 18, 2013 that a Chinese firm placed an order for around 30 CSeries airplanes. This marks the entry of the CSeries in the growing Chinese market. Another order for CSeries is from Indonesia's 'PT Lion Mentari' airlines. This airline is expected to announce an order for CSeries next year. Currently Bombardier has around 177 confirmed orders for the CSeries; however, its target is 300 units to enter service up to the middle of next year.

Besides serving Bombardier, United Technologies' aerospace systems segment supplies various components to Boeing (BA) for its 787 commercial airplane series. On October 9, 2013, Xiamen Airlines selected United Technologies' aerospace systems segment to supply wheels and brakes for its Boeing 787-8 fleet of six airplanes. The first Boeing 787-8 of this fleet is expected to be delivered in July 2014. The brakes provided by the aerospace systems segment use a proprietary material, which increases brake life by 35%, providing significant savings in operating cost for these Boeing commercial airplanes.

In the third quarter of fiscal year 2013, the aerospace systems segment of United Technologies grew by 24% to $3.31 billion year over year. We expect that this growth momentum will continue next year as supply to Boeing and Bombardier increases.

Expanding with contracts

On October 30, 2013, United Technologies received three contracts for approximately $205 million from the U.S. Department of Defense. Out of the total contracts for $205 million given to United Technologies, two contracts for $197.66 million were awarded to Sikorsky. Under the $110.8 million contract, Sikorsky is expected to provide organizational, intermediate, and depot level maintenance to support T-34, T-44, and T-6 aircrafts of the U.S. Navy. As per this contract, Sikorsky is also expected to provide logistic support, which includes labor, services, facilities, equipment, tools, and related support equipment, to these aircrafts until October 2014.

This segment of United Technologies contributed around 9.97% of the company's net sales in the third quarter of fiscal year 2013. However, this segment declined by 6.55% in the third quarter year over year. With the addition of these contracts, we expect that the yearly decline will reduce, and going forward the revenue contribution of Sikorsky will increase.

Dividend scrutiny

On October 9, 2013, United Technologies hiked its dividend by 10% year over year to $0.589 per share, payable on December 10, 2013. The company has a long dividend history, as depicted in the chart below. On current stock price of $108, its dividend yield is 2.17%, near the past five year's average dividend yield of 2.39%. Going forward, we expect that with the growth in its various segments, the company's cash flows will increase, and consequently the regular dividend paid by United Technologies will also increase.


(Click to enlarge)

Source: Company s report

On the other hand, the primary buyer of its various aerospace components, Boeing, expects to fetch investors' attention with a hike in dividend. To grow fundamentally, Boeing is betting on its commercial planes segment, which we discussed in our recent article on Boeing. It also hiked its dividend by 11.36% year over year to $0.485 per share, to be paid on December 6, 2013. Boeing also has a long dividend history, which has made it a profitable bet for investors.

Conclusion

The above discussed strong fundamentals of United Technologies are supported by its stock valuation. The company's twelve months trailing price to earnings, or PE, ratio is 19.2, significantly higher than its forward PE ratio of 15.88, implying that United Technologies' earnings are expected to increase going forward. The company's price to book, or PB, ratio is 3.43, lower than the industry s PB ratio of 24.1, signifying that the stock currently is undervalued and expected to incline going forward. United Technologies' return on equity, or ROE, is 23.5%, notably higher than the industry's ROE of 15.7%. The company's dividend yield is 2.17%, which is also higher than the industry's dividend yield of 2.1%. With respect to growth fundamentals and strong valuation, we advise investors to rely on the company for comfortable returns.

Source: United Technologies: No Constraints For Growth