It is about time to revisit the merger of United Technologies (UTX) and Goodrich Corp. (GR) that was announced last year. It is bound to happen soon, and there are some important things for us to consider as investors as we look at United Technologies. How will it affect the company in both the short term and the long term?
United Technologies makes most of its money selling helicopters, aircraft parts, elevators and escalators, and heating and air conditioning systems for buildings, with around two-thirds of its revenues coming from abroad. It is the dominant player in the Chinese elevator market with an impressive three-quarters share of the market. China has about one-third of the world's elevators. The remaining third off United Technologies' revenues come from the sale of aircraft, aircraft parts, and aircraft maintenance. As a result, the company is subject to the cyclical trends of the aerospace market.
Though the deal is not expected to close until mid-2012 and may not boost United Technologies' earnings for another two years after that, together the companies will generate $66 billion in revenue this year. Based on 2011 estimates, the purchase adds sales of about $8 billion a year. But the benefits will not be felt or experienced right away. This is a long-term investment. Between a cutback in spending and paying off the new debt the company is taking on, it will be some time before any significant numbers can be seen on the books that will make the merger look good. The powers that be know this is a long-term investment for United Technologies.
Solid growth from aerospace in 2012 and 2013 will help the company. As the economy recovers and commercial and residential construction picks up, so will that. Pratt & Whitney, the aircraft engine unit of United Technologies, expects sales to double by the end of the decade to $24 billion. That alone will keep business coming from the aerospace division.
So, for the short term, we are going to continue to follow the trend of the stock and put together a short-term income strategy while we wait for a long-term entry point.
Click to enlarge image.
The Options Play
With the stock presently trading at $78.91 and trending down, we will play a Bear Put Spread.
- Buy an August 2012 put with a '77.50' strike (priced at $3.55)
- Sell an August 2012 put with a '75' strike (priced at $2.55)
- Net Debit to Start: $1.00
- Maximum Profit: $1.50
Reasoning Behind The Trade
- The stock is trending down.
- The merger will create more short-term debt, causing the company to continue cutbacks.
- Numbers on the books won't look good right away, not giving any good reason for quick short-term gains.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
