United Technologies Goes for Broke

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

On Friday, one Fool reader dropped me a note asking: "What is going on with defense stocks today?" I mean, it was a good day for stocks overall. The Dow Jones Industrial Average (INDEX: ^DJI) gained more than half a percent. But defense stocks? They went absolutely haywire.

L-3 Communications (Nasdaq: LLL  ) rose a clean 1.5%, more than twice the average gain on the Dow. Boeing (NYSE: BA  ) clocked a 1.6% gain. Textron (NYSE: TXT  ) nearly 7%. Rockwell Collins (NYSE: COL  ) , nearly 8%. What was going on?

As it turned out, the answer was as simple as ABC -- or rather, UTC: United Technologies Corp. (NYSE: UTX  ) . As the day progressed, news began filtering out that UTC was revving up a major acquisition in the defense space, lining up bankers to back a $20 billion bid for ... somebody. And investors were laying odds on who the lucky winner of a UTC-led buyout would be.

Winners and losers
Sadly, many investors guessed wrong; UTC was not angling to buy any of the companies named above. After markets closed for the day, we learned UTC was really deep in negotiations to acquire rival aerospace components maker and fellow Boeing supplier Goodrich (NYSE: GR  ) . As The Wall Street Journal confirmed over the weekend, Goodrich is at the top of UTC's shopping list, with price being the only remaining sticking point.

Once again, investors are laying odds. After bidding Goodrich shares up more than 7% Friday, arbitrageurs doubled down and added 16% more to the firm's market cap Monday -- and this might not be the end of it. Bloomberg reports that Goodrich shares that fetch $107 and change today could add another $15 before a deal is finalized. If they're right, this would give Goodrich a $15 billion market cap -- not too far off from the $20 billion warchest UTC was said to be filling out last week.

The real loser
For UTC shareholders, though, I hope the news proves false -- because $15 billion is way too much to pay for Goodrich. At $15 billion in market cap, Goodrich shares would be selling for 22.4 times earnings. That's nearly 10 points more than UTC's own shares currently fetch, and a pretty premium to Goodrich's 14% long-term growth estimates as well. While I certainly understand the temptation to pay up for growth, in UTC's case, I have just three words of advice: Resist the temptation. Goodrich costs too much.

Will United Technologies ultimately pay up for Goodrich? And if not them, who else might UTC buy? Add it to your watchlist and find out.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 362 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of L-3 Communications Holdings and Textron. Motley Fool newsletter services have recommended buying shares of L-3 Communications Holdings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1556481, ~/Articles/ArticleHandler.aspx, 10/26/2016 4:05:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 6 hours ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 4:04 PM
UTX $101.36 Up +1.84 +1.85%
United Technologie… CAPS Rating: ****
^DJI $18169.27 Down -53.76 -0.30%
BA $139.02 Up +1.57 +1.14%
Boeing CAPS Rating: ****
COL $80.00 Up +0.79 +1.00%
Rockwell Collins CAPS Rating: ****
GR.DL $0.00 Down +0.00 +0.00%
Goodrich Corp CAPS Rating: ****
TXT $39.13 Up +0.10 +0.26%
Textron CAPS Rating: ****