So, yesterday evening, I hear the Defense Department awarded United Technologies
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?
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
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
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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Fool contributor Rich Smith owns shares of AeroVironment, iRobot, and Ceradyne (you name it, he buys it.) iRobot is a Rule Breakers pick. Get your free refresher course in The Motley Fool's disclosure policy.