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United Technologies' & Raytheon's Shareholders Approve Merger

Zacks Equity Research

United Technologies Corporation UTX and Raytheon Company RTN on Oct 11 announced that shareholders of both the companies have approved all the proposals required for the acquisition of latter by the former in a deal termed as a “merger of equals”. Following the announcement, United Technologies’ share price increased 1.7% to eventually close at $136.15 on Friday.

Notably, the approval keeps both the companies well on track to complete the merger in the first half of 2020, conditional upon customary closing conditions and separation of the Otis and Carrier businesses from parent United Technologies (as announced in November 2018).

Raytheon Technologies Corporation — as the combined company will be known — will include the aerospace businesses comprising Collins Aerospace and Pratt & Whitney of United Technologies, and Raytheon.  Notably, the new entity’s headquarters will be located in the greater Boston metro area.

There are some notable points to consider, reflecting the cost and benefits of this proposed merger. The major driver of the merger is diversification within the aerospace and defense in addition to cost-cutting synergies. The combined company is likely to generate in excess of $1 billion in gross annual run-rate cost synergies by the fourth year of completion of the deal.

Our Take

United Technologies is well poised to gain from strength in commercial aftermarket and military businesses. Also, strong orders for the company’s Geared Turbofan engines and its continuous focus on investment across aerospace products portfolio, are likely to drive the company's aerospace business revenues. For 2019, it anticipates organic sales to grow roughly 4-5%, higher than 3-5% guided earlier.

Also, the company’s buyout of Rockwell Collins (completed in November 2018) is worth mentioning. Notably, the deal has been fortifying the company's existing product portfolio, and also aiding in launching innovative solutions for aerospace customers. United Technologies expects the acquisition to be accretive to adjusted earnings per share in 2019, with cost synergies of at least $600 million by the fourth year of deal completion.

However, escalating cost of sales has been a major cause of concern for United Technologies. Notably, in the second quarter, the company’s cost of sales was up 16% year over year on account of higher input costs, including commodities, tariffs and logistics expenses.

In the past six months, the Zacks Rank #3 (Hold) company has returned 0.8% against industry’s decline of 5%.

Key Picks

A couple of better-ranked stocks from the same space include HC2 Holdings, Inc. HCHC and Macquarie Infrastructure Company MIC. Both these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

HC2 Holdings outpaced estimates thrice in the preceding four quarters, the average positive earnings surprise being 48.55%.

Macquarie’s earnings surprise in the last reported quarter was 26.04%.

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