On Thursday, the Dow Jones Industrials (DJINDICES:^DJI) fell back from its record high, dropping 22 points on a mixed day for the broader market. Most investors were content to wait for tomorrow's key employment report from the Labor Department, which could help establish whether the economy in April improved from its winter deep-freeze. Yet, contributing to the losses in the Dow Jones Industrials today were United Technologies (NYSE:UTX) and Boeing (NYSE:BA), and investors want to know if they can count on the Dow's two main companies with ties to the defense industry in light of a recent merger-spinoff deal between competitors in the business.
For the most part, today's declines in United Technologies and Boeing seemed unrelated to any news affecting the two companies. United Technologies' Pratt & Whitney division shut down a test engine yesterday, but the news didn't produce major concerns then, and appear not to have been responsible for any decline today. Moreover, with United Technologies having conducted full-system tests of its CH-53K heavy-lift helicopter for the U.S. Marine Corps, the conglomerate hopes to ramp-up a program that will include four helicopters during a three-year test program for safety and performance checking. Similarly, Boeing said yesterday afternoon that it expects to finish the flight-testing phase of development of its 787-9 stretch Dreamliner model, and start delivering the aircraft within the next few mont. Progress on its 737MAX and wide-body 777X models are also proceeding well.
But one question facing Boeing and United Technologies is whether they will seek to acquire smaller counterparts in the defense industry in order to bolster their overall business. Yesterday's deal between Alliant Techsystems and Orbital Sciences will create a stronger defense-oriented business, with Alliant spinning off its consumer-facing business to free both divisions to focus more on their specialties.
At this point, though, it seems unlikely that United Technologies or Boeing will change its overall strategic directions. For Boeing, the rise of its commercial aircraft division couldn't have come at a better time, as it has allowed the aerospace giant not to worry so much about the ebb and flow of defense budgets and, instead, focus on the certain opportunity in its commercial business. At a time when its most important task is executing on its commercial backlog, it would be surprising to see Boeing shift attention back toward its defense niche.
United Technologies arguably has even less incentive to participate in any defense-industry consolidation. Not only does it stand to gain from Boeing's commercial-aviation success, but United Technologies also has solid divisions beyond civilian and military aerospace, including its Otis elevator and Carrier HVAC brands. It's possible that the right company specializing in helicopters or aircraft engines could make a good fit for United Technologies, but it's unlikely to be a key strategic move for the company.
The defense industry will likely go through changes in the future, as companies look for the best way to take advantage of limited opportunities. Yet, United Technologies and Boeing have already identified their exit strategies from defense, and they're apt to keep looking to their other businesses for long-term growth.
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