UTC Looks To Unlock Value From Sikorsky

United Technologies (NYSE:UTX) has finally announced that it is looking at divesting its Sikorsky helicopter unit. ^[1] Sikorsky is one of the largest makers of military and commercial helicopters in the world including the Black Hawk and Marine One, which flies the President. However, in recent years, this business has been severely impacted by weak U.S. defense spending and a slowdown in demand for helicopters from the oil and gas sector due to lower crude oil prices. In our view, the recent drop in oil prices, coupled with the anticipation that oil prices could remain weak for the foreseeable future, prompted United Technologies (UTC) to reevaluate this business. Sikorsky had been counting on higher sales of commercial helicopters from the oil and gas sector; however, as crude oil prices fell, demand for helicopters from the sector dropped.

Last year, Sikorsky generated $7.5 billion in sales, but just $219 million in operating profit, which was impacted by a one-time charge from a Canadian maritime helicopter contract. Sikorsky’s margin has been in the single-digits for several years now, compared to 15-20% operating margins at other UTC businesses. ^[2] A divestiture of Sikorsky could allow UTC to unlock value by reinvesting proceeds from the sale in its higher margin businesses.

We currently have a price estimate of $125 for UTC, marginally ahead of its current market price.

See our complete analysis of UTC here

Sikorsky Operating In A Tough Environment

Contrary to the negative impact from weak U.S. defense spending and lower helicopter demand from the oil and gas sector, Sikorsky will see gains from a few recent defense contract wins. Last year, the company won a contract to build the next fleet of Marine One helicopters, and the contract to produce the next generation of combat rescue helicopters for the U.S. Air Force. Together, these two contracts hold a sizable production backlog for Sikorsky. In December, Sikorsky also bagged a key Indian Navy helicopter deal. However, despite these contract wins, the bottom line is that Sikorsky is a low-margin, slow growing business, which is highly dependent on U.S. defense spending. U.S. government contracts constitute more than half of Sikorsky’s total sales. The company’s shipments have also struggled to grow in recent years. In 2014, Sikorsky shipped 178 military helicopters, marginally up from 177 it shipped the year before, and it shipped 59 commercial helicopters, down from 63 it shipped in 2013. ^[3]

Divestiture Would Improve Margins

A divestiture of Sikorsky would likely boost UTC’s operating margins, enabling it to generate more value from its invested capital. One of the options available to UTC is to sell Sikorsky to another defense company such as Boeing (NYSE:BA) or Textron‘s (NYSE:TXT) Bell unit. However, if UTC decides to sell Sikorsky to another company, then it will have to pay significant taxes on the corresponding sale proceeds. Another option is to spin off Sikorsky as an independent, public company. UTC has said that it will make a decision on this before the end of 2015.

Sikorsky constitutes about a tenth of UTC’s top line. UTC’s other major businesses include Otis, Carrier, Pratt & Whitney and a large aerospace component business.

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1. United Technologies to explore strategic alternatives for its Sikorsky Aircraft Business, March 11 2015, www.utc.com [↩]
2. UTC’s 2014 10-K, Feb 2015, www.utc.com [↩]
3. UTC’s 2014 Q4 earnings presentation, January 27 2015, www.utc.com [↩]