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United Technologies (NYSE:UTX) will present its annual results for 2013 on January 22. The stock has risen almost 30% since January 2013. Is the increase justified or not?

UTC acquired the Goodrich Corporation in 2012 to strengthen its position in the commercial aerospace industry. It almost doubled UTC's debt and it is uncertain if the Goodrich acquisition will bring the positive results initially envisioned.

This article is the 7th in the series on the global aerospace industry. The aerospace divisions of UTC will be compared in performance to its peers, which include General Electric (NYSE:GE), Boeing (NYSE:BA), Rolls-Royce (OTCPK:RYCEY) and Safran (OTCPK:SAFRY).

FUNDAMENTALS

All financial data used is published by UTC.

  • Stock price used is $114.21;
  • All figures with the exception of EPS and Dividend are x1m.
    Corporate20122011201020092008
    Revenue$57,708$55,664$54,326$52,425$58,681
    Net income$5,270$4,979$4,373$3,829$4,689
    EBIT$7,684$7,756$7,186$6,377$7,625
    EBIT%13.32%13.93%13.23%12.16%12.99%
    FCF-$148.0$5,174.0$2,283.0$3,824.0$3,693.0
    EPS5.665.494.744.124.90
    Dividend$2.03$1.87$1.70$1.54$1.35
    Dividend Yield1.78%
    ROA5.89%8.10%7.48%6.87%8.30%
    ROCE11.71%18.11%17.63%16.85%20.59%
    ROE19.30%21.48%19.31%17.90%27.70%
    Debt/Equity2.271.651.581.612.34
    PE (Price/Earnings)20.18

United Technologies Corporation has the following divisions:

Sikorsky: is the helicopter manufacturing division of UTC for the military and commercial market.

Helicopters (Sikorsky)20122011201020092008
Revenue$6,791$7,355$6,684$6,287$5,346
EBIT$712$840$716$608$478
EBIT%10.48%11.42%10.71%9.67%8.94%

Pratt & Whitney: designs, produces and services aircraft engines, gas turbines and space propulsion. UTC increased its stake in the IAE V2500 engine consortium buying the Rolls-Royce participation in 2011.

Engines (Pratt&Whitney)20122011201020092008
Revenue$13,964$12,711$12,935$12,392$13,849
EBIT$1,589$1,867$1,987$1,835$2,122
EBIT%11.38%14.69%15.36%14.81%15.32%

Aerospace Systems: designs, produces and services systems and components for military and commercial aircraft. This division incorporates the Goodrich Corporation.

Aerospace Systems20122011201020092008
Revenue$8,334$4,760$5,608$5,560$6,127
EBIT$944$759$918$857$1,099
EBIT%11.33%15.95%16.37%15.41%17.94%

Building & Industrial Systems: provides building technologies. Otis Elevators and Carrier heating and air conditioning are among its brands.

Building & Industrial Systems20122011201020092008
Revenue$29,146$31,301$29,455$28,561$34,147
EBIT$4,937$5,027$4,351$3,680$4,335
EBIT%16.94%16.06%14.77%12.88%12.70%

Engines

Pratt & Whitney, the engine division will be compared with the other major aerospace engine manufacturers. From the United States this is General Electric. From Europe these are Safran, the French Connection, Rolls-Royce and Germany's MTU Aero Engines.

(click to enlarge)

  • UTC and Rolls-Royce are the largest aerospace manufacturers;
  • General Electric and Safran are the most profitable, but Rolls-Royce is catching up;
  • The EBIT% from both UTC and MTU Aero Engines is declining. UTC increased its ownership in the IAE V2500 engine consortium buying the Rolls-Royce stake in 2011. UTC holds about 50% and 25% for Germany's MTU Aero Engines.

The IAE V2500 deal at first hand doesn't look profitable for both UTC and MTU. Rolls-Royce may have gotten the better part of the deal. Apart from an immediate amount of money, they also get a percentage for each hour flown with a V2500 for 15 years! Rolls-Royce is certainly improving since the sale.

Helicopters

Sikorsky, the helicopter division is compared with Boeing, AgustaWestland, the helicopter division of Finmeccanica (OTCPK:FINMY) from Italy and with Airbus. The military divisions of Boeing and Airbus are compared in the battle for leadership.

(click to enlarge)

  • All helicopter manufacturers have similar profitability. However, Airbus's profitability is much lower
  • UTC is the largest helicopter manufacturer but is showing a decline in 2012 while the other manufacturers have (a slight) growth

CONCLUSION

(click to enlarge)

When viewing the fundamentals and comparing the helicopter and engine divisions the question arises if UTC has the right strategy?

The Building & Infrastructure Systems divisions have grown in profitability, but strategic investments and focus seems to be on the aerospace divisions. All are showing a declining profitability trend.

The major risks identified by UTC are the integration of Goodrich in the Aerospace Systems division, as well as the debt accumulated to acquire Goodrich. The tone of the last investor and analyst meeting is also cautious.

For United Technologies Corporation the 2013 results will be important. Is the strategy taken, the right one? Are the results showing signs of an upward trend reversal?

UTC is not a stock to buy before these results are known. The downward risk is too high. If the results for 2013 disappoint and worse than expected, UTC may take a dive.

Source: United Technologies: Time To Sell?