Three months ago, new United Technologies (NYSE: UTX) CEO Gregory Hayes stopped just short of promising shareholders that he would not sell Sikorsky. Three months later, it sounds like he's planning to do just that.
In a public announcement last week, Hayes informed investors of his progress on plans to tweak UTC's portfolio of companies and goose its own growth rate. In direct contradiction to indications made in December, however, Hayes is increasingly focusing on Sikorsky as key to these plans.
Prefacing his remarks with praise for Sikorsky as "a world leader in the design, manufacture and service of military and commercial helicopter platforms," Hayes explained that he is nonetheless "exploring strategic options for Sikorsky to determine the best way to ... create improved long-term value for UTC's customers and shareholders." One option in particular that he's considering is a "Sikorsky spinoff creating a stand-alone public company."
But how would that help shareholders?
Pros and cons
Looking into this issue last year, when Hayes' predecessor Louis Chenevert was reportedly looking at similar options, I highlighted three reasons that UTC might consider selling Sikorsky. Briefly:
- Sikorsky was, and still is, UTC's smallest business, bringing in just $6.25 billion in sales in 2013.
- Sikorsky was also UTC's least profitable business in 2013, earning just 10.3% operating profit margins -- less than half the profits earned at Otis Elevator, just to pick one comparison.
- What's more, Sikorsky was less profitable than helicopter-making rivals Kaman and Textron.
All of this suggested that UTC might be better off jettisoning Sikorsky and refocusing its attention on businesses that make it more money. But even so, when all was said and done, I argued UTC should hold on to Sikorsky, which after all makes America's biggest helicopter (the CH-53E Super Stallion), the world's most popular military helicopter brand (the Blackhawk), and the most prestigious helicopter as well (the U.S. president's Marine One).
Simply put, Sikorsky's business was too good to let go. But is that still the case?
It depends on how you look at things. In 2014, for example, Sikorsky booked $7.45 billion in revenue -- a 19% improvement year over year, and in a year when UTC as a whole grew revenues only 4% (according to S&P Capital IQ data). That certainly sounds good.
On the other hand, profits earned on that revenue fell off a cliff, with Sikorsky earning pre-tax operating profit of just $219 million in 2014. That was less than half what Sikorsky earned the year before, and less than 3% of Sikorsky's stronger revenues.
Now consider further that by selling Sikorsky (or spinning it off), United Technologies can probably expect to receive at least the one-times annual sales valuation usually accorded to defense contractors, which would be nearly $7.5 billion in cash for United Technologies (or a $7.5 billion market cap for Sikorsky, if spun off). That's $1.2 billion more than Sikorsky probably would have fetched a year ago. And it's a lot of cash that UTC could put toward either paying down its $19.8 billion debt load or financing the purchase of another big acquisition -- perhaps one that UTC could run more profitably than it's done with Sikorsky.
Personally, I still think that getting rid of Sikorsky would be a mistake. The company simply has too much potential. Then again, I'm not a CFO-turned-CEO like Hayes. From a chief accountant's point of view, the more you look at Sikorsky's numbers, the more it looks like UTC will ultimately decide to get rid of it.