Two of the larger U.S. aerospace and defense corporations reported for the 4th Quarter of 2011 Wednesday and both posted similar results. Boeing (BA) and United Technologies (UTX) were able to match or beat analysts' expectations but were more pessimistic about the coming year. The trends they reported if they continue will allow them to weather the potential cuts to U.S. defense spending in the near future.
Boeing had earnings of $1.31 a share which represented a nearly 20 percent increase over the same quarter in 2010 on revenue that increased a like amount to $19.6 billion. Earnings per share were well above predictions but revenue was only $200 million. The Chicago based aircraft manufacturer and major defense contractor feels that pension costs will drag down profits to below the $4.96 predicted on $78 billion or more of revenue.
United Technologies also saw earnings up 12 percent from the past year on $15 billion in revenue. The company is confident it can meet earnings of $5.80 to $6.00 a share on $60 billion, which is a little above analysts' predictions.
While the two companies rely heavily on the Pentagon for a fair share of there revenue and profit, unlike other large contractors they also have significant sales to the commercial aviation market.
Boeing obviously makes airliners and has done very well selling its 787 and 737 MAX to the world's airlines. These help offset potential declines in orders from the Air Force and Navy as the U.S. defense budget is cut. The backlog the company has for this market is almost $300 billion.
United Technologies also sells to the commercial market through its Pratt & Whitney and Sikorsky Aircraft Corporation divisions. P&W engines are found on many aircraft manufactured by Boeing and EADS as well as smaller commercial products. Sikorsky makes commercial variants of its military helicopters as well as some direct products, and while the commercial helicopter business is still recovering, has had some sales. United Technologies is also in the process of acquiring Goodrich (GR) which makes components for commercial and military aircraft. This will expand United Technologies' penetration of that market even more and give them more opportunities.
These kinds of products and markets will help cushion the planned reductions in defense spending. Boeing made quite clear in their earnings conference call that they hope aggressive pricing and international orders will help them keep their defense and space sales up. This means clearly that they expect more competition for less work in the U.S. market. United Technologies too is hoping that their commercial aerospace business will keep their earnings consistent in the near term. The acquisition of Goodrich is a key enabler of that goal.
Another global recession or economic downturn caused by the European debt crisis could though seriously affect these plans. The commercial aviation market is still recovering from the 2008 crisis with consolidation in the U.S. market. Problems in China could lead to that country's aerospace business not growing as forecast, affecting Boeing and United Technologies' sales, which could mean - combined with the downturn in defense spending - a blow to their plans.
Currently it looks like the two companies are well positioned to use their balanced business lines to adjust to the coming changes in U.S. defense spending and maintain their recent performance. While the defense component may become flat or decline, the commercial part will keep the stocks doing relatively well and remain a solid investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
