The Indian Navy's decision to buy 16 Sikorsky S-70B Seahawk helicopters can be seen as a huge development for Sikorsky, a unit of United Technologies (NYSE:UTX), keeping in mind the recent decline in the overall US military spending, which accounts for roughly 50% of Sikorsky's sales. This deal, which is expected to be worth $1 billion, not only opens up opportunities for Sikorsky in India but also ensures that this unit's dependence on the US military spending will decrease.
The Sikorsky unit makes up roughly 3.9% of the stock price for United Technologies, and an expected improvement in the unit's performance is a contributing factor towards a price estimate of around $121 for United Technologies' stock, which is roughly 5% higher than the stock's current price.
Let's take a look at some of the factors that have allowed the financial performance of Sikorsky to improve, what its plans for the future are and how these plans will allow investors to benefit from them.
The Indian military spending is growing
India is not only an immensely attractive market for manufacturers of consumer goods but it is also an excellent market for defense equipment. It is one of the world's most important defense equipment importers, which is evident by the fact that the company imported $5.6 billion worth of arms in the year 2013, $2 billion worth of which were from the US.
This trend can be expected to continue in the near as well as the distant future. For a company like United Technologies, this is excellent news.
The recent deal with the Indian Navy has opened up a plethora of opportunities for the company. With the growing demand for defense equipment in India, the company can expect significant increases in the revenues that it will be generating from the Indian market. The overall $2 billion that India spent on importing defense equipment from the US is expected to increase in the year 2014.
Presently, Boeing (BA) and Lockheed Martin (LMT) are the major suppliers of defense equipment to India. Boeing's C-17 Globemaster and P-18 anti-submarine warfare airplanes and Lockheed's C-130J Super Hercules airplanes have been imported by India.
If Sikorsky can manage to make its place in the Indian market, the benefits to the company can be paramount. This deal has already allowed it to enter the market; with the passage of time, the company can aim to capture a higher market share in India. This will eventually lead to United Technologies becoming one of the major suppliers of defense equipment to India alongside Lockheed and Boeing thus allowing its revenues from the Indian market to increase significantly.
The Indian Market isn't the only foreign market the company aims to target
The US has lately been reducing its overall military spending significantly as a result of which all the country's major suppliers of defense equipment have been under pressure. Roughly half of Sikorsky's revenues have been coming from US military spending and this decline has been hurting the company's top line, which fell from $7.3 billion to $6.7 billion to $6.2 billion during the years 2011, 2012, and 2013, respectively.
This declining trend is expected to continue in the years to come. The company has successfully managed to identify the fact that it needs to decrease its dependence on the US military spending and that it needs to expand to international markets if it wishes to remain profitable in the years to come.
The overall military spending in Asian markets has been on the rise and it is expected that total spending on military equipment will increase to a total of $1.4 trillion within the next five years. One of the markets that will be significantly contributing to this increase is the Indian market, which Sikorsky has already entered.
The second most important contributor to this increase in Asian military spending is going to be China, which has been increasing its military spending significantly over the past few years. Targeting this market will allow the company to target two of Asia's largest importers of defense equipment. A large market share in the Asian market will mean the company will no longer be dependent on the US military spending as a result of which the decline in US military spending will stop hurting the performance of the company.
This is excellent news for investors as this will ensure higher earnings for the company which will be translated into higher returns for the company's investors.
The company has shifted its primary focus from providing military equipment to the US to providing military equipment to rapidly growing markets. This is a very wise initiative keeping in mind the current scenario. Since the markets it now focuses on are growing markets, the competition to capture a high market share in them is obviously high. However, the company has the potential to deal with this competition and ensure that it manages to capture a significant portion of the market share as a result of which it will experience high growth rates in the years to come.
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