If its name were any more generic, it’d be called “Business Company.” Yet the generically-labeled United Technologies Corp. (UTX) is a $109 billion conglomerate with one of the most consistent and profitable histories of any American corporation. Shares of the firm were trading at around $136 on February 28, 2018, well above the 50 day moving average. The stock saw a 2% bump following reports that Bill Ackman's Pershing Square Capital Management was building a position in the company.
United Technologies Corp. is a defense contractor, but it has a civilian business worth tens of billions. It's an escalator manufacturer, but one that also makes heating and air conditioning units. However, first and foremost, United Technologies makes jet engines.
A Start in Aircraft
The company was founded in the 1930s as United Aircraft, a supplier to the burgeoning aerospace industry. The stock became one of the Dow Jones Industrial Average components later that decade, and has remained on the index ever since. In the mid-1970s, the company changed its name and started acquiring non-aerospace companies, such as Carrier Corp. (the refrigeration people) and Otis Elevator Co. (forever synonymous with elevators). Today, the latter is one of United Technologies' four major business segments (Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems).
As an elevator user, you probably take Otis’s handiwork for granted. Unless you’re atop the Burj Khalifa or the CN Tower, it’s doubtful that you paid directly for the ride. The building contractors who do pay for elevators, however, are responsible for moving Otis and thus United Technologies to a place of market dominance.
HVAC and More
Climate, Controls & Security is the department of United Technologies devoted to HVAC systems. But the segment also encompasses firefighting equipment, which is a bigger market than you might think. Climate, Controls & Security includes the Carrier division, which makes supermarket freezers, refrigerated shipping containers, rooftop refrigeration units and heat pumps, among other unexciting industrial breakthroughs that get little attention but that make life in the civilized world far more efficient and comfortable than it would otherwise be.
Pratt & Whitney, another takeover subject, is one of the three-largest aircraft engine manufacturers in the world. As a separately operating entity, this subsidiary earned $1.4 billion in 2017 on revenues of $16.2 billion. If you’re ever reclined your seat in a Boeing 757, or fired a missile from an F-22 Raptor (at least one person reading this might have), you’ve been in a position to do so courtesy of a Pratt & Whitney engine.
From Engines to Propellers
Even with an engine manufacturer as a subsidiary, there’s still room for United Technologies’ own branded Aerospace Systems sector. That airplanes are complex pieces of machinery goes without saying; what might need to be reinforced is that every individual part can come from a different place. United Technologies, for instance, sells exterior lighting systems for planes, which appear in the books in a separate category from interior lighting systems. The Aerospace Systems department's portfolio also includes air data and aircraft sensing systems, engine control systems, propeller systems, and landing gear. Its customers run the gamut from aircraft manufacturers like Boeing Co. (BA) and Airbus Group to the government, both in the U.S. and abroad.
On balance, it’s a four-way race for the title of largest United Technologies segment. Climate, Controls & Security is the biggest segment, contributing $17.8 billion to revenue in 2017. It’s followed by Pratt & Whitney at $16.2 billion, Aerospace Systems at $14.7 billion, and Otis at $12.3 billion. Aerospace Systems has the greatest momentum of the four, its size more or less doubling in each of the last couple of years. (again, mostly thanks to acquisitions). Profitability is similar, with a few exceptions. Climate, Controls & Security stands at the top of the heap turning in $3.3 billion in profit last year, followed by Aerospace with $2.37 billion. Otis is the third largest profit maker, bringing in $2 billion in 2017. Otis’s profit margin is thus a hefty 16.4%, second only to Climate, Controls & Security. Market share and brand recognition are everything, and continue to perpetuate Otis as the undisputed market leader. If you can name the world’s second-largest elevator manufacturer, you probably work in the industry.
(Fun fact: It’s Schindler, out of Switzerland.)
The Bottom Line
At some point, perhaps centuries hence, air travel will be superseded as the quickest and most efficient way to transport passengers, cargo and weaponry. Until that point, aerospace companies will still have to rely on the expertise of the field’s chosen industry leaders like United Technologies.