Is This Aerospace Supplier Wasting Your Money?

Stock buybacks generally are considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.

But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself; rather, use it as a launching pad for additional research.

On a wing and a prayer
According to commercial jet manufacturer Boeing (NYSE: BA) , the industry will witness steady 5% annual growth in global traffic for the next 20 years with Latin America, the Middle East, and the Asia-Pacific regions enjoying the largest gains. That's going to translate into demand for 34,000 new planes valued at $4.5 trillion, meaning that the bet United Technologies (NYSE: UTX) made on the industry ought to pay off handsomely.

The conglomerate has been realigning its focus to concentrate on aerospace. Earlier this year it spun off its Pratt & Whitney Rocketdyne division after President Obama undertook to reform the mission of NASA away from space exploration. Rocketdyne was a primary supplier of rockets to the agency while the Hamilton Sundstrand division, also being jettisoned, was the maker of NASA's space suits. As I noted in February: "Without any major leaps for mankind in NASA's future, the units will only serve as a drag on UTC's performance."

Going vertical
UT will use the money raised from the spin-off to pay for the integration of its huge $18.4 billion acquisition of Goodrich, the world's largest manufacturer of aircraft landing gear. While the deal, which closed in July, will shave $0.20 off of earnings this year, it will add $0.50 to per share profits next year. Boeing estimates earnings will range between $5.25 and $5.35 per share, and while it hasn't provided guidance for 2013, Wall Street anticipates it'll come in at $6.26 per share, about 18% high at the midpoint.

The aerospace specialist also recently acquired International Aero Engines, an engine maker for Airbus's A320 plane.

Becoming a vertical supplier to the industry means jet makers may look to UT for more systems. For example, General Electric (NYSE: GE) currently supplies the engines for Boeing's new Dreamliner, Honeywell (NYSE: HON) provides the steering mechanisms, and Spirit AeroSystems provides "aerostructures," such as the forward fuselage, wing components, and engine pylons.

Two tickets to paradise
The segment already dominated United Technologies' operations accounting for 43% of its revenues, but now it will grow to more than half of the total. While it counts both Boeing and Airbus among its customers, the federal government remains the largest customer for both United Technologies and Goodrich. As spending cuts loom -- not to mention the budget sequestration battle that could force steep automatic spending cuts (and tax increases) on January 2 -- there's at least some reason for enthusiasm being dampened.

While the size of the Goodrich acquisition forces UT to consider only significantly smaller deals in the future, it also means it will push UT to begin repurchasing shares again (buybacks it suspended to pay for the Goodrich deal), planning to spend as much as $2 billion. There should be at least $1 billion made in 2013.

That's the spirit
Considering the growth opportunities in the industry, the need for more and better fuel-efficient planes, and United Technologies' expansive lineup of parts, analyst expectations of 11.5% long-term growth for the supplier may be right on the money.

Trading at just 12 times next year's earnings, it does offer a premium to other aerospace contractors like Spirit, General Dynamics (NYSE: GD) , and Lockheed Martin. Moreover its enterprise value trades at 14 times its free cash flow, not particularly overvalued yet not a bargain-basement stock either.

I think the aerospace supplier is a good long-term winner and I'm rating it to outperform the market indexes on Motley Fool CAPS, but I'd probably wait for some weakness to be exhibited in the share price before becoming more aggressive. The stock's already pulled back 5% from its recent peak and is down nearly 10% from its 52-week high; if it dropped to the low $70 range then it would be a lot more attractive to me. But let me know in the comments section below if you think United Technologies' stock will take flight from here.

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