The recent upswing in the U.S. Gross Domestic Product will have a ripple effect in many different areas. For example, a stronger economy means higher tax revenues for the federal government and lower budget deficits, which could mean more room for increased defense spending.
Another important bit of recent news was the swearing-in of the new Congress, the first one since 2006 to be completely controlled by Republicans. The GOP could start pushing for more Pentagon spending in the inevitable budget negotiations with the President.
Both of these developments are good news for United Technologies (NYSE: UTX), one of America's biggest and most successful defense contractors. But there are also good reasons to invest in United beyond the political climate.
United Technologies provides technology products and services to the building systems and aerospace industries worldwide. It has been one of the major players in the industrial goods sector and aerospace/defense industry for decades. The firm is particularly well known for its Pratt & Whitney aerospace systems arm and its Sikorsky helicopters.
The stock price reached a high of 120 in the summer of 2014, but then tumbled down to 100 in the wake of one poor earnings report. But shares of UTX are now clearly marching higher as the company releases more positive numbers. Fortunately, there's still time to join the party.
In a meeting with investors and analysts before Christmas, UTX President & Chief Executive Officer Gregory Hayes announced the company's expectation for 2014 earnings per share of$6.80, at the mid-point of the previous earnings outlook of$6.75 to $6.85. The 2014 EPS expectation includes a charge of$0.25related to a previously disclosed German court case.
The company continues to expect sales for 2014 of approximately$65 billion. The company also anticipates 2015 earnings per share of$7.00 to $7.20, up 3 to 6 percent. Sales for 2015 are expected to be$66 billion to $67 billion, including 3 to 5 percent organic growth.
"2014 has been a solid year for United Technologies," Hayes said. "We expect to deliver earnings growth of 10 percent on a 4 percent increase in organic sales, despite a slow-growth global economy. With strong backlog and orders momentum exiting the year, we anticipate continued organic sales growth in 2015 across each of our businesses."
He added: "The portfolio is well positioned in growth markets and we've made the right investments to drive sustainable long-term shareholder value."The balance sheet bears him out.
New equipment orders increased 10 percent year over year, led by 27 percent growth in China. Large commercial engine spares orders were up 11 percent at Pratt & Whitney and commercial spares orders increased 9 percent at UTC Aerospace Systems.
"Continued organic growth and orders strength give us confidence in our sales expectation of$64 billion for 2014," added Hayes. "Based on visibility to additional restructuring projects with solid returns, we now plan to increase restructuring spending from$300 million to$375 million, which we expect to be offset by one-time gains."
The U.S. military continues to be one of United Technologies' most important customers, and in the last several months the Connecticut-based company has secured important new contracts with both the Navy and the Air Force.
The Navy announced recently that Sikorsky Aircraft, a subsidiary of United Technologies, has been selected to build the next fleet of Marine One helicopters for the Office of the President.
With the selection comes a $1.24 billion Engineering and Manufacturing Development (EMD) contract to modify, test and deliver six FAA-certified S-92 helicopters and two trainer simulators to the U.S. Marine Corps. Covering a period of performance into late 2020, the fixed price incentive firm contract is the initial step to providing, by 2023, a Presidential Helicopter Replacement fleet totaling 21 operational aircraft.
But there's more to the company's portfolio than just defense contracting. Kidde Fire Safety, a part of UTC Building & Industrial Systems, is expected to benefit from a new California law that just took effect.
All battery-powered smoke alarm or combination (smoke and carbon monoxide) alarms approved for sale by the state fire marshal must now be powered by a sealed battery with a minimum life of 10 years. The law is based on the recommendations of national organizations like the National Fire Protection Association. Kidde offers a complete selection of smoke alarms which are in compliance with the new law.
UT's existing contracts, plus its increasing presence in the consumer products market, will make it a reliable performer no matter what happens with the federal budget. The possibility of rising Pentagon spending is just one more reason why this company is a good fit for your long-term growth portfolio. It's a buy up to 115.
Tom Scarlett is an investment analyst at Investing Daily.
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