United Technologies (NYSE:UTX) stock may no longer include Rocketdyne in its portfolio. But with divisions like Pratt & Whitney, UTC Aerospace, and Sikorsky still within the fold, the company's still a force to be reckoned with within the aerospace and defense industry.
Today, we're going to take a look at just three reasons why this major aerospace player -- whose stock has lagged the market quite badly over this past year -- could still turn things around, and go on to hit new heights.
Appropriately enough, the first of these reasons is a UTC division whose very existence owes to people's desire to reach new heights -- namely lobby, first floor, penthouse, and parking garage. We're talking, of course, about...
Elevators may seem a strange line of business for an aerospace company to be in. But in fact, United Technologies stock gets the majority of its revenues from non-aerospace businesses. The company's biggest revenue driver is its Climate, Controls & Security division, which makes HVAC, surveillance equipment, and fire sprinkler systems for buildings. But UTC's most profitable division is its more than century-old Otis Elevator Company.
Last quarter, Otis posted a 20.6% operating profit margin -- more than two full points ahead of UTC's second-best division (the aforementioned Climate, Controls & Security, or CCS). What's more, while sales were down slightly at CCS, Otis Elevator recorded a better than 7% increase in sales year over year.
Those sales are accelerating, too, outpacing the 6% pace set through this year's first half. Even better, UTC noted that new equipment orders in the all-important North American market (where UTC makes most of its sales) grew 44% year over year in Q2, offsetting weakness in Europe and keeping orders growing 3% in comparison to last year.
"Solid growth" was reported in "China, the Americas, and the Middle East," and Chinese sales in particular are expected to rise about 15% in this year's second half, according to UTC CFO Gregory Hayes.
Bucking the trend
We've all heard how the U.S. government is strapped for cash, "sequestering" its spending, and cutting back on defense expenditures. None of that can be good news for a company like United Technologies, which gets about 54% of its sales from the aerospace and defense markets (according to Capital IQ data), right?
Well, actually... maybe not right. Because as it turns out, while many defense industry companies are suffering from the slowdown in government spending -- United Technologies stock is not one of them.
In Q2 of this year (and over the entire first half, for that matter), sales in UTC's aerospace and defense divisions grew quite nicely. Sales at Pratt & Whitney were down less than 1% in Q2, while sales at both UTC Aerospace Systems and Sikorsky were up -- 9.5% and 52.2%, respectively.
Sales are up, period
And that's not all. While the strength of UTC's aerospace and defense business in the face of Pentagon budget cuts is certainly a pleasant surprise, the truth is that sales are chugging along pretty well all across UTC lately. In Q2, consolidated net sales for the company grew a respectable 7.4%, better than three times the 2.4% pace set in Q1, and fast enough to lift UTC to a 5% annualized growth rate for H1 as a whole.
True, operating profit margins took a bit of a dip when UTC's Sikorsky division recorded a big charge to earnings, resulting from amendments to its Canadian Maritime Helicopter contract. That saddled the division with a quarterly loss of $438 million, and helped drive down profit margins for the company as a whole. But Sikorsky was never the company's most profitable division to begin with, and remains the company's smallest business by revenue. With sales at UTC's more profitable divisions growing nicely, chances are good that profit margins will soon turn around and resume rising in short order.
When that happens, United Technologies stock will have a good chance of rising in tandem.
Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.