United Technologies Faces a Bright Future After Shunning Honeywell

By Markets Fool.com

The proposed takeover of United Technologies by Honeywell for around $90.7 billion was rejected by the former, and the latter has now ended its interest in a potential deal. This seems to be good news for United Technologies, since the deal could have caused regulatory issues resulting from competition concerns. Furthermore, with both companies being key suppliers to the aerospace industry, there was scope for a negative reaction from customers for whom United Technologies and Honeywell are both key suppliers.

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In other words, concerns about a lack of competition could have delayed progress of the combined entity, causing sales growth to be held back and eating into the proposed synergies of around $3.5 billion. And with the prospect for a prolonged takeover period and the potential for asset disposals to allay regulatory concerns over the coming months, the decision to reject Honeywell's approach seems to have been the right one.

A major tailwind
However, the main reason United Technologies is better off without Honeywell is the bright future it faces as a stand-alone business. A key reason is a demographic tailwind, with an increasing world population that is forecast to reach 9.7 billion by 2050 and offers the potential to provide significant growth opportunities for United Technologies' core business segments.

Within this population growth, there is an increasing trend toward urbanization, with 180,000 people moving to urban areas every day, according to the company. And by 2050, cities are expected to be inhabited by 2.5 billion more people than today, thereby generating greater demand for the products and services United Technologies provides, such as elevators, climate systems, and security systems.

Furthermore, an increasing world population is likely to increase demand for air travel -- especially as the middle-income earners in the emerging world continue to grow in number. It's estimated that this will be a key catalyst in an increase in the number of commercial planes, which is set to rise by around 82% in the next 15 years. As with urbanization, this should benefit United Technologies through its exposure to the sector via Pratt & Whitney and its aerospace division.

International exposure
Clearly, much of the world's population growth will be centered on the developing world. United Technologies has a major presence in China, in India, and across emerging markets. In the shorter term, this exposure may also benefit the company with regard to a currency tailwind, with the U.S. dollar having the potential to weaken somewhat because of a slower than previously anticipated tightening of monetary policy. In fact, evidence of the impact of currency fluctuations can be seen in United Technologies' results from 2015, with total sales being reduced by 4% because of a stronger U.S. dollar.

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An improving business
In addition, United Technologies is also improving as a business, initiating a $1.5 billion multiyear restructuring program last year that's expected to deliver $900 million in annualized cost savings. Allied to this move is a renewed focus on innovation, with the United Technologies Research Center supporting the delivery of new capabilities across the company by collaborating with external entities such as universities and research organizations. A notable example of recent success in this space includes the PurePower Geared Turbofan engine, which provides double-digit improvements in fuel efficiency, noise levels, and emissions.

Acquisition potential
Meanwhile, United Technologies continues to have strong cash flow, which in itself provides it with the opportunity to engage in M&A activity. For example, free cash flow has exceeded net income in eight of the past 10 years, which proves how resilient and consistent the company's financial position is. This financial strength has caused rumors to persist surrounding a potential bid for UK aerospace and defense company Rolls-Royce, with such deals having the potential to add to United Technologies' organic growth appeal.

Looking ahead
So, while the potential Honeywell deal has come and gone, United Technologies is left on its own facing a very bright future. With the potential for demographic changes to positively affect its earnings in the long run, the scope for a currency tailwind, innovation through its research center, and the potential for cost savings as well as M&A activity, United Technologies seems to have numerous positive catalysts to boost its financial performance.

The article United Technologies Faces a Bright Future After Shunning Honeywell originally appeared on Fool.com.

Robert Stephenshas no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.