The aerospace industry drove growth in United Technologies‘s (NYSE:UTX) 2013 results despite weakness from the building markets of Europe. In 2014, we figure that the global aerospace industry will continue to remain strong with higher demand from commercial aviation, partially offset by the softer US military market. Last year, United Technologies (UTC) generated about 45% of its revenues from the global aerospace industry comprising of the commercial and military aviation markets. The industrial conglomerate’s Pratt & Whitney segment, which produces and services airplane engines, and the Aerospace Systems segment (UTAS), which makes airplane parts like landing gears, nacelle, cockpit and electronic systems, constitute roughly equal shares of its aerospace revenues.
We currently have a stock price estimate of $121 for UTC, around 5% ahead of its current market price.
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Higher Demand From Commercial Original Equipment & Aftermarket Will Lift UTC’s 2014 Results
Last year, global air passenger traffic grew by about 5% year-over-year, according to traffic results released by the International Air Traffic Association (IATA).  This year, the organization expects the annual growth in international air passenger traffic to accelerate to 6%. It also forecasts airlines worldwide to collectively post profits of about $20 billion.  As airlines fly more passengers and book higher profits in 2014, they will likely continue to order spare parts and new airplanes. UTC’s Aerospace Systems (UTAS) segment, which serves nearly every commercial airplane flying currently, will thus likely see its aftermarket part sales from airlines rise in 2014.
At the same time, driven by huge orders placed by airlines over the past few years, airplane manufacturers such as Boeing and Airbus are raising their production rates. At the start of this year, Boeing hiked its 787 Dreamliner production rate to 10 airplanes per month from 7 per month. Thereafter, earlier this month, the company raised its 737 production rate to 42 airplanes per month, from 38 per month. Together these two models constitute more than three-fourth of Boeing’s total commercial airplane deliveries. Coupled with higher average production rates at Airbus, airplane engine shipments from Pratt & Whitney and part shipments from UTAS to original equipment manufacturers will also grow in 2014.
Lower US Defense Spending Will Weigh On 2014 Results
However, this growth in UTC’s results from commercial aviation will likely be offset in part by weakness from lower US defense spending. Currently, the US government constitutes about $9 billion or 14% of UTC’s total revenues.  The company anticipates its 2014 sales from the government to contract by 3-5% annually due to the latter’s budget cuts.  Even though the repeal of across-the-board spending cuts, called sequestration, earlier in the year brought some cheer, the fiscal 2014 budget passed by the Congress will likely not support growth in UTC’s military aviation sales.
All in all, we figure in 2014, growth from commercial aviation’s original equipment as well as aftermarket segments will more than offset weakness from US military market to grow UTC’s results.Notes:
- Air passenger market analysis – December 2013, December 2013, www.iata.org [↩]
- Financial forecast briefing note, December 2013, www.iata.org [↩]
- UTC at Cowen and Company 35th Annual Aerospace/Defense Conference, February 6 2014, www.utc.com [↩]
- UTC’s 2013 Q4 earnings transcript, January 22 2014, www.utc.com [↩]