Since proceeds from selling Sikorsky will be used to repurchase stock, United Technologies' (UTX +2.09%) new four-division structure is likely to remain in place for some time to come. These divisions are Otis (2014 revenue of $13 billion); Carrier, along with fire safety and access control ($17 billion); Pratt & Whitney (P&W) ($15 billion); and aerospace systems ($14 billion). Except for security/access control, all these operations are No. 1 or 2 in their businesses.
With minor exceptions, United Technologies makes capital goods, but much of its revenue comes from the aftermarket for them. This accounts, for instance, for 60% of Otis' revenue. This is not to say that United Technologies' products are loss-leaders, and that it relies on the aftermarket for profits (the razor-and-blades model): Although this is currently the case with P&W's commercial-jet business, this is due to problems rather than strategy. But inevitably, the pricing for almost all United Technologies' original equipment businesses is affected by the value of the franchises that the sales of its products create.
In the slides accompanying an August 2015 presentation, United Technologies' CEO indicated that normalized revenue growth for these divisions should be in the mid- to high-single digits. Except for Carrier -- thanks to solid North American demand across both commercial and household lines, which is likely to continue -- United Technologies will not achieve these growth rates in 2015, and is unlikely to in 2016, either. Since 62% of revenue is earned outside of the U.S., currency movements are an important contributor to this shortfall.
However, Otis has been losing both original equipment and service market share in foreign markets, largely through mismanagement that will require a major reorganization to turn around. Commercial aircraft order books are bursting. But P&W must invest heavily to meet demand, especially since it is already suffering from manufacturing bottlenecks and loses $1 million per engine delivered. It will take several years climbing the learning curve before it can deliver its new PurePower turbofan without even greater losses per unit. Meanwhile, independent service providers are cutting into service margins. Aerospace systems also faces competition in the aftermarket, while its original equipment business should benefit from the strength of commercial demand.
This leaves the 15% of United Technologies' revenue that, post-Sikorsky, derives from military contracting as the only potential source of news that would cause the company's shares to pull out of their rut any time soon. Except for whatever engines actually get delivered for the troubled F-35 program, P&W's share of this will gradually wind down unless it wins the contract for the B-3 bomber. The controversy between Northrup Grumman (NOC +1.60%) and joint bidders Boeing (BA +2.79%) and Lockheed Martin (LMT +0.85%) over cost estimates built into Northrup Grumman's bid means that P&W is unlikely to receive news -- good or otherwise -- about this contract until well into 2016 at the earliest. Meanwhile, aerospace systems' military activities continue to suffer from competition in the aftermarket.
This suggests that the only catalyst in the offing for United Technologies' share price is valuation. According to YCharts, United Technologies is neither a bargain nor expensive based on trailing data. Share repurchases and a 2.7% dividend yield provide some support, but until the outlook changes, United Technologies is likely to remain one of the less interesting industrial conglomerates.