At the time, I noted the sprawling defense and industrials firm had completed a $23 billion buyout of aerospace supplier Rockwell Collins.
I went on to say that United Technologies provides access to a very lucrative field of investing – corporate spinoffs. This one gives shareholders access to three separate stocks.
But today I’m writing to let you know I now have placed the stock on hold. Rest assured this was not an easy decision.
After all, I still believe in the company’s long-term growth.
It’s the short term that is the problem, now that the firm has announced an all-stock deal to merge with Raytheon Co. (NYSE:RTN) to create a defense giant with $74 billion in sales.
So today I’m going to walk you through the reasons I have the stock on hold.
Why Long-haul Spinoffs Can Pay
If you have followed along with me for any length of time, then you know I’m a big fan of corporate spinoffs. Slimming down a big company often greatly improves efficiencies and profit margins.
It’s also good for shareholders. Consider that two professors at Penn State University examined 30 years of market data covering 174 spin-offs.
Their study revealed that in the first three years of operations, these new companies showed price appreciations of 76%, beating the S&P 500 by 31%.
That’s backed up by Lehman Bros., which studied 85 spin-offs between 2000 and 2005. The firm found that they beat the S&P 500 by as much as 45% in their first two years as independent companies.
In the case of UTX, investors get access to three stocks for the price of one. After it completed the merger with Rockwell Collins last November, United Technologies said it would spin off its Otis elevator and Carrier building systems units into separate firms.
Otis has more than $12 billion in yearly sales, much of that in the form of recurring revenues. It produces more than $2 billion in adjusted earnings each year.
And the Carrier segment is a global leader in heating, ventilation and air-conditioning (HVAC). It has around $18 billion in yearly sales and is quite profitable. Last year, it brought in roughly $3.5 billion in adjusted earnings.
So, I’m still a big believer in the value of the spinoff. I think it will pay off well… over the long haul.
But the company’s decision to merge with Raytheon casts too much short-term doubt on the stock.
Before I go into those details, let me explain what I mean by a “hold” on UTX.
Literally, I’m saying that if you own it already, I would not sell unless for some reason it triggers your protective stop. The main thing is not to wade in now, no matter what you hear from Wall Street.
I have three main reasons for saying this:
- The complex move to bulk up and spinoff at the same time could distract management until it’s all complete in the first half of next year.
- President Trump has already voiced concerns that the combined firm might limit competition at a time when Capitol Hill also is worried about corporate size.
- Activist investor Bill Ackman has come out strongly against the deal. His Pershing Square Capital Management hedge fund owns more than $700 million in UTX stock, and is likely to seek help from other investors in trying to block the deal.
If I had to guess, based on what I know about the defense industry and the need to deliver more platforms with greater efficiency, I’d say the merger will ultimately go through.
However, UTX is asking investors to wait at least six months and maybe a year before we know how all this shakes out.
That’s a long time for shareholders to circle the wagons. And there’s no reason to do that.
Not when we can instead put our hard-earned money into Lockheed Martin Corp. (NYSE:LMT), a leader in so many areas of defense tech.
Lockheed’s Cutting Edge Tech
The storied firm derives more than $50 billion in yearly sales from four key areas: global aerospace, defense, security and advanced technologies.
Lockheed’s most important program is the cutting-edge F35 fighter jet. It’s brimming with a host of the firm’s most advanced technologies.
This is a 5th generation fighter that combines advanced stealth with lightning speed and agility. It also boasts fully fused sensor information and network-enabled operations.
And it spans the Pentagon. You see, it’s being used here at home by the U.S. Air Force, Navy and Marine Corps, not to mention other countries around the world.
These planes are so advanced compared to anything else flying in the world that demand is surging from 90 planes this year to around 130, annually, within the next few years.
And the sprawling giant operates a range of smaller divisions focused on Sikorsky military and commercial helicopters, naval systems, platform integration, simulation and training.
Lockheed also offers us forays into blockchain technology and space exploration.
With blockchain, the firm said it had become the first U.S. military contractor to build the robust digital platform right into its development programs back in May 2017.
Teams that oversee supply chain risk management, systems engineering, and software development are using blockchain tech. Lockheed also plans to make distributed ledgers a permanent a part its cyber-defense offerings.
Meantime, let’s not forget the role Lockheed plays in the nation’s space programs. For instance, NASA landed the Insight robotic space explorer on Mars late last year.
The firm played an integral role in the mission. Lockheed was responsible for building all three components to the spacecraft, including the cruising stage, the heat-absorbing shell and the lander.
Add it all up and you can see why Lockheed makes such a great play on defense, space and the blockchain. They set the company up to go on an earnings tear.
While the firm had $7.1 billion in operating income last year, that figure is expected to surge to $10 billion by 2020.
Make no mistake, this is a great performer. Since the market rebounded on Dec. 24, 2018, the S&P 500 is up 22.5%.
By contrast, LMT gained more than 40.5%. That means Lockheed beat the broad market by 80%. Even better, it crushed the broad market by 142% over the past five years.
So this is a stock you can really count on for the long haul.
It’s a great foundational play that can help form the bedrock of a great tech-centric portfolio that helps you build your net worth.
Of course, Lockheed is also going to benefit from a new cellular technology that’s about to go live coast-to-coast across America. It’ll deliver lightning-quick connection speeds like we’ve just never seen before.
I’m talking about 5G, and it’s so advanced, you’re probably going to see cable turn extinct. Instead, the next-generation smart phones, tablets, and TVs will need to be updated for 5G.
But that’s just the beginning. Turns out, 5G also has military potential. It can enable military bases and command posts with smart technology, enhancing communication between bases by using wave-powered cameras and motion sensor-enabled technology.
The profit opportunities are deep and wide with 5G, and you can be a part of them.
Cheers and good investing,
Michael A. Robinson