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With the debt-ceiling crisis behind us, but with looming spending cuts as part of the agreement, things aren't looking great for companies in the defense industry. After a decade of growing defense budgets, the looming end of two wars could have a great impact on many companies that rely on defense spending. One company that stands out amongst others in this sector is United Technologies (NYS: UTX) . Because of its commercial subsidiaries, it is prepared for a possible reduction in federal defense spending, and it's also a great stock for the long haul.
You're up, then you're down
Otis Elevator is UTC's most profitable subsidiary, bringing in nearly 36% of its operating profits in 2010. It's easy to see why Otis is so successful. There are approximately 2.3 million Otis elevators and escalators in operation worldwide in more than 200 countries and territories, making Otis the world's largest manufacturer and installer of elevators and escalators. Add to that more than 1.7 million systems under maintenance contracts, and Otis will continue to be a hedge against defense cuts for United Technologies.
You're hot, then you're cold
Carrier is another UTC subsidiary with most of its business outside the defense realm. Unlike Otis, however, Carrier faces a bit more competition in its primary business of heating, ventilation, and air-conditioning systems. Companies like AAON (NAS: AAON) , Lennox International (NYS: LII) , and Comfort Systems (NYS: FIX) all provide systems to cool us down in the summer and heat us up in the winter.
When deciding from among these companies, one factor to look at is dividend yield. Carrier helps UTC come out on top in that category, though Lennox is close behind. Carrier is yet another piece of the UTC puzzle protecting the company from defense cuts.
You're in, then you're out
UTC Fire & Security is the third piece of UTC's shield against defense cuts. F&S makes and installs fire and security alarms, as the name suggests, and does it pretty well. During 2010, UTC acquired the security company of General Electric (NYS: GE) , which allowed it to increase the operating profits of F&S by almost 45% over 2009, representing 10% of total operating profit for the year. There are a few larger competitors in the security sector, however, with Brinks (NYS: BCO) and Tyco International's ADT focusing on residential security and Stanley Black & Decker (NYS: SWK) subsidiary Sonitrol monitoring commercial properties. Even so, UTC Fire & Security will continue to add value and help monitor non-defense spending growth for UTC.
Don't be wrong when it's right
Combined, these companies accounted for a little more than 60% of UTC's operating profits last year, giving UTC the ability to deflect some losses from what's expected to be reduced defense spending. Thec company won't stop making money from jet engines and helicopters, but it is poised to continue being a good bet in its sector, if not the entire market. Add United Technologies to your Watchlist to see whether my thesis plays out.
At the time thisarticle was published Fool contributorRobert Eberhardowns no shares in any company mentioned here. Follow him on Twitter, where he goes by@GuruEbby. The Motley Fool owns, andMotley Fool newsletter serviceshave recommended buying, shares of Brinks. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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