United Technologies: Moving Ahead With A United Segmental Growth

| About: United Technologies (UTX)

United Technologies' (UTX) two business segments Sikorsky, and Pratt & Whitney contributed around 9.5% and 22.7% respectively to the total revenue in the first nine months of 2013. Sikorsky recently received new orders, which will further help its contribution to increase in the future. On the other hand, United's strong tie-up with Lockheed Martin (LMT) is helping in ramping up the production of its fighter jet F35. These tailwinds will help the company to post better results in the coming year.

Sikorsky manufactures helicopters that are used for commercial and military operations. Sikorsky signed a contract with CHC, under which it will purchase around nine 'S-92' helicopters from Sikorsky. CHC is a Canada based company that provides helicopter transportation service in about 30 countries. Out of the total fleet of CHC, Sikorsky made almost half of the helicopters.

Delivery of the S-92 helicopters is expected to commence in 2015. CHC will use these helicopters for offshore oil operations and search and rescue operations. Currently, the cost of an S-92 helicopter is $17.7 million and with the procurement of nine such helicopters, this contract is expected to be worth around $159.3 million. S-92 belongs to the 'long helicopter' category, and CHC is expected to buy an additional 15 S-92 helicopters in addition to the above mentioned nine helicopters. S-92 can fly up to 539 nautical miles, which is 26.2% longer as compared to average for all large helicopters. It can also fly at a speed of 151 knots, 3.4% faster than all large helicopters' average speed. Assuming that CHC purchases 15 more helicopters, then this contract can provide an additional $265.5 million of total revenue in the future.

Under another order, Brunei's Ministry of Defense received two Sikorsky's S-70i helicopters this month. Currently, two more S-70i helicopters are undergoing the acceptance process of the Ministry of Defense, which ordered for 12 such helicopters. The ministry ordered these S-70i helicopters to meet its regional security requirements. This fleet of 12 helicopters is scheduled to be completely delivered by the end of next year. As per the terms of this contract, the Ministry of Defense has an option to purchase ten more helicopters in addition to the 12 S-70i helicopters discussed above.

Currently, S-70i is priced around $11.5 million, and through the above deal it can yield approximately $138 million for Sikorsky. In case, the Ministry of Defense avails its option to buy 10 more helicopters, Sikorsky can generate additional revenue of around $115 million. This means Sikorsky has the potential to generate revenue of around $253 million from this contract. Sikorsky currently accounts for around 9.96% of United Technologies' net sales. These contracts will increase this segment's contribution in the future.

Growth as a supplier

United Technologies' Pratt and Whitney segment finalized a $1.1 billion contract with the Pentagon. Pratt and Whitney is expected to manufacture around 38 engines for Lockheed Martin's F-35 fighter jets. Up until now, Pratt and Whitney has delivered around 115 engines. The delivery of these new engines for F-35 fighter jets is expected to commence in the fourth quarter of this year.

Growth in the production of Lockheed Martin's F-35 fighter jets will be beneficial for Pratt and Whitney. The F-35 jet production rate is expected to increase from 29 per annum this year to 42 per annum in fiscal year 2015. Lockheed already has orders from Norway, Israel, and Japan for the F-35, which will help United Technologies too.

On December 11, Norway authorized the purchase of six more F-35 jets. This brought the order from Norway to 16 F-35 fighter jets. Norway is expected to purchase these six jets for $654.7 million, so the F-35 jets are expected to cost around $109.11 million per jet. For an order of 16 jets, Lockheed Martin is estimated to generate revenue of $1.74 billion from Norway. These contracts will be equally beneficial for Pratt and Whitney, which accounted for around 21.89% of United Technologies net sales in the third quarter of fiscal year 2013. With the increase in growth of the F-35 jets, I expect this revenue contribution will increase in the future.


United Technologies' revenue from Sikorsky is expected to increase with its contract from CHC and Brunei's Ministry of Defense in the future. Its segment, Pratt and Whitney is betting on orders to supply engines for Lockheed Martin's F-35. Apart from this, the stock valuation of United Technologies supports my belief that the company is an attractive buying option. United Technologies' price to earnings ratio is 16, lower than the industry's 17.88. The company's expected P/S is 1.54 times, lower than the industry's P/S, which is 1.81 times. United Technologies' price earnings to growth, or PEG, ratio is 0.37, which is lower than the industry's PEG ratio of 0.74.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.