United Technologies Corporation UTX CEO Hayes outlined a roadmap for his vision of the company’s portfolio of businesses, after its Wednesday announcement of a potential spinoff of Sikorsky being on the cards.
In a much-awaited annual investor and analyst meet yesterday, the conglomerate declared that it is inclined to spend over $1 billion on acquisitions this year, as it scours for targets with strong growth potential.
United Technologies currently has three almost equal revenue generators: aerospace, defense and building systems. The company is already looking at years of distressed margins in its Pratt & Whitney business.
The engine maker is ramping up production and is still absorbing research and manufacturing costs related to a new family of commercial airplane engines. The unit’s earnings will be sluggish for some time as jet engines turn profitable only after they start generating service revenue.
Further, the conglomerate’s commercial-building business, accounting for roughly one-third of total revenue, has been facing headwinds due to macroeconomic slowdown in Europe.
The company’s helicopter unit Sikorsky is facing a potential split-off, as it continues to face tepid growth in revenue and profits amid a shrinking U.S. defense budget. (For details, read: United Technologies to Spin off Black Hawk-Maker Sikorsky?)
United Technologies faces a tough acquisition climate due to high pricing, making it difficult to find a good buyer for the maker of the flagship Black Hawk helicopters. However, analysts believe that potential suitors include The Boeing Company BA, Textron Inc. TXT and defense giant Lockheed Martin Corp. LMT.
Hayes believes that the splitting Sikorsky from the parent company would unlock value by giving shareholders a choice between owning a helicopter company or an aerospace and commercial buildings firm.
The company has set an aggressive target to raise revenues to $100 billion by 2020, from $65 billion this year. Hayes emphasized that it is looking to go the acquisition route in order to achieve the ambitious target.
The company expects to generate around $45 billion in free cash flow between now and the end of the decade. Also, having paid off half of the debt it took on for the Goodrich Corp. acquisition, the company is in a strong position financially to make an acquisition. However, Hayes stressed that any prospective deal must meet stringent criteria on returns, value and strategy.
Until a potential deal surfaces, the company will focus on buying back $2 billion in stock next year, up from around $1.5 billion this year, Hayes said. In the absence of a major acquisition, the repurchase target could easily go to $3 billion.
The company’s stock was pretty languid before the management shake-up last November. Shares of United Technologies have climbed almost 9% since Hayes took over, compared to a 0.1% decline for the S&P 500 index, suggesting that investors are optimistic about Hayes’ capabilities and his recent attempts to transform the company’s portfolio.
United Technologies currently carries a Zacks Rank #3 (Hold).
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