Aerospace & Defense

Does Dumping Sikorsky Really Make a Difference for United Technologies?

Sikorsky S-76
Source: Sikorsky Aircraft/United Technologies Corp.
United Technologies Corp. (NYSE: UTX) made it official Monday morning: the industrial giant will “pursue the separation of the Sikorsky Aircraft Business” from the mothership. The company said in March that it was reviewing strategic alternatives for the business, so it’s no big surprise.

What is surprising, perhaps, is that after three months of review UTC apparently can’t sell the Sikorsky business. At the time we noted that Sikorsky generated annual sales of about about $7.5 billion, two-thirds of which comes from defense, and is the smallest of UTC’s five major business units.

In today’s announcement the company said that 2015 earnings per share without Sikorsky should total $6.35 to $6.55 compared with a current consensus estimate including Sikorsky of $7.00. UTC also said 2015 sales will total $58 to $59 billion compared with a consensus estimate of $65.1 billion.

The big problem with any kind of separation is taxes. UTC has owned Sikorsky since 1929 and the tax basis for the division is very low and the appreciation is going to be very high.

But UTC had to do something. The company’s stock price, currently around $115, is considerably less than a sum-of-the-parts valuation of $161 a share reportedly calculated by Sterne Agee CRT analyst Peter Arment in February.

Shedding Sikorsky, which Arment calculated was worth $8 to $10 a share at a market cap of around $7 to $8.5 billion, is not going to have a major impact on UTC and its $110 billion valuation. The company’s valuation has dropped to around $102 in Monday trading even though that’s well below the consensus price target of around $133.50 from Thomson/First Call.

In the mid-afternoon Monday, UTC traded down about 2.4% at $114.79 in a 52-week range of $97.30 to $124.45.

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