United Tech's $12 Billion Crickets

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So, yesterday evening, I hear the Defense Department awarded United Technologies (NYSE: UTX) a $1.5 billion contract to build Black Hawk and Medevac helicopters.

[Crickets, chirruping.]

Did I mention that this deal is part of a production contract, announced earlier this month, that could reach $11.6 billion in value over the next five years?

[More crickets.]

Over the two weeks and change since United Tech (UTC) won the production contract, the company's share price has barely budged. Mr. Market's strange lack of reaction to the news had me flummoxed, but it also piqued my curiosity.

Context is everything
When smaller defense contractors -- say, AeroVironment (Nasdaq: AVAV), Ceradyne (Nasdaq: CRDN), or iRobot (Nasdaq: IRBT) -- win contracts worth a few tens or hundreds of millions, their stock prices rocket skywards. Sure, UTC's orders are of a magnitude larger than these pipsqueak upstarts, but the military's helicopter contracts are correspondingly large, especially relative to the UTC division winning them.

You see, $11.6 billion amounts to about 12 weeks' worth of revenue to UTC. But to the Sikorsky division within UTC, it represents more than three-and-a-half years worth of revenues. Put in that context, it seems Thursday's news, and the bigger news that preceded it, should have been cause for rejoicing among UTC shareholders.

Except for one thing
Problem is, within the conglomerate that is UTC, Sikorsky is the tail that fails to wag the dog. Clocking in at $3.2 billion in sales last year (about the same size as Textron's (NYSE: TXT) Bell), Sikorsky is the smallest division within the company. Moreover, its 5.4% operating margin means it is also UTC's least profitable division.

As such, investors can be forgiven for thinking 3.5 years worth of revenue at Sikorsky is pretty small potatoes. (In contrast, a contract for Otis to build urban assault elevators for an 18.3% margin -- now that would be something.) But while such an opinion would be forgivable, it would also be mistaken.

By my calculations, even earning 5.4% margins on $11.6 billion could add $125 million per year to UTC's operating profit over the next five years -- boosting the firm's take by as much as 2%. And if the new business allows Sikorsky to work closer to full capacity, improving its operating efficiency enough to lift the division toward its more historical rate of 8% to 9% operating margins? That could be good for as much as 3% profits annual growth, from a single contract.

Which shows you how much crickets know about investing.

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