UTC’s Chenevert: A Big Bet on Commercial Aircraft

His $16.5 billion Goodrich deal puts United Technology's future where the growth is

   
UTC’s Chenevert: A Big Bet on Commercial Aircraft

On the surface, it’s hard to imagine two men more different than the late reclusive billionaire Howard Hughes and United Technologies (NYSE:UTX) Chairman and CEO Louis Chenevert.

For starters, the Canada-born Chenevert is neither reclusive nor a billionaire (though with total compensation of more than $15 million and ownership of $33.6 million in UTX stock, he’s hardly in the poor house).

But when it comes to business, the similarities are striking: a zeal for innovation, an affinity for aviation-related manufacturing and a love of Pratt & Whitney engines.

Chenevert became United Tech’s president and COO in 2006 after spending 13 years at its Pratt & Whitney aircraft-engines unit — the last six as president. He succeeded George David as CEO in 2008, gaining the title of chairman in 2010. Before joining Pratt & Whitney, Chenevert spent 14 years at General Motors (NYSE:GM), eventually as production general manager of a GM plant in Canada.

Since he stepped into the top job at the start of the Great Recession, UTX shares have risen 171%. The Dow rose a mere 5% during that time. Investors have ample reason to value Chenevert’s firm commitment to drive shareholder value.

But if you’re aiming for consistent double-digit growth, you’ve got to take some risks — another thing Chenevert and Hughes had in common. Chenevert put his legacy on the line last September when he closed the largest acquisition in UTX’s history: the $16.5 billion all-cash deal for Goodrich Corp. (NYSE:GR).

Of even greater significance is the fact that Goodrich, which specializes in aircraft components such as landing gear and engine nacelles, further increases the $74 billion market cap company’s strength in commercial aviation.

Chenevert believes financial discipline has a key role to play in a deal this big. United Tech last month announced plans to raise as much as $3 billion by selling off three of its businesses to help fund the acquisition: Pratt & Whitney’s Rocketdyne rocket and space-systems unit, Clipper Windpower and Hamilton Sundstrand’s fluid-control and air-compressor businesses.

As a result, the company could end up issuing less than $2 billion in stock, Chenevert told analysts in February. Goodrich makes parts for Boeing’s (NYSE:BA) 787 Dreamliner and the EADS Airbus A320neo.

The Goodrich deal comes at a time when some of UTX’s core businesses — notably its Otis elevator unit — are struggling. The company also is facing serious headwinds in Europe in its heating and cooling lines.

Chenevert is examining ways to gain even greater control over costs by driving a $450 million reorganization effort this year in the Pratt & Whitney, Otis and Climate, Controls & Security units.

But why is the market-savvy Chenevert focusing so much attention on the commercial-aircraft industry? Because commercial aviation is likely to be UTX’s biggest money-making opportunity over the next two decades.

Call it a simple calculation of supply and demand. At February’s Singapore Air Show, Boeing forecast that the world’s airlines would need 33,500 new planes by 2030, at a list price of $4 trillion. Rival Airbus expects demand for 27,800 planes of more than 100 seats in that same time frame.

So boosting UTX’s competitive position in commercial aviation is even more important now given the company’s defense exposure — its many contracts include engines for Lockheed Martin’s (NYSE:LMT) much delayed F-35 joint strike fighter.

Leaner military budgets and the end of the Space Shuttle program have put increased pressure on companies such as United Tech to further diversify their revenue streams. Staking a bigger claim on the commercial-aviation sector makes sense for several reasons: a dramatic surge in global air travel demand, particularly in Asia; aging aircraft fleets and the need for more fuel-efficient planes.

Because of Chenevert’s ardent pursuit of Goodrich and other gutsy moves last year, Aviation Week named him its 2011 Person of the Year. Chenevert “rocked the aerospace and defense (A&D) industries with a string of bold moves that improbably came together in a single year,” Aviation Week’s Joe Anselmo wrote.

Another of Chenevert’s defining moves was the geared turbofan (GTF) engine, his much-scoffed-at “$1-billion-plus pet project” that Airbus has chosen as an engine option for its popular A320neo. The engine’s sophisticated design can deliver at least 15% better fuel efficiency than traditional engines.  Chenevert has said he believes that can be pushed to 25% by 2020.

Chenevert’s tireless commitment to engine innovation might well have saved Pratt & Whitney from an unfortunate future. The company dropped the ball back in the1980s by failing to protect its position in the narrow-body jet market. And that’s the market segment that will experience the strongest growth over the next 20 years.

The proof of Chenevert’s strategy is in sales: Pratt already has firm orders for more than 800 GTF engines earmarked for the A320neo. He told Aviation Week earlier this year that “the ultimate prize to me is to get on the next-generation 737.”

But the GTF win was as much about strategy as it was about technology. Chenevert first sold the GTF to Montreal-based regional jet manufacturer Bombardier for its new single-aisle CSeries jets, which were competing with the 737 and A320neo for the same business. Almost overnight, the GE (NYSE:GE) Aviation and Snecma CFM consortium’s LEAP engine was facing a tough new competitor.

Then Chenevert turned the heat up even more: Pratt bought out Rolls-Royce’s share in the International Aero Engines venture that produces Airbus A320 engines. It then formed a new partnership with Rolls-Royce aimed at building GTF engines for midsize aircraft.

“The sum of Louis Chenevert’s achievements will reverberate for many years to come,” said Aviation Week’s editor-in-chief, Anthony Velocci Jr. “He’s the person who had the most impact on the industry in 2011.”

After Howard Hughes’s H-1 Racer broke the world’s land speed record in 1937, he heaped praise on Pratt & Whitney’s contribution to his innovative plane. “This airplane was fast because it was clean and yet it attained its speed with a Pratt & Whitney engine of perfectly normal design with normal reliability,” he said.

After Pratt failed to compete for the narrow-body jet engine market in the 1980s, many people gave the company up for dead. But Chenevert dismissed the naysayers. He believed in Pratt and trusted its ability to prevail and prosper by fielding an innovative, leading-edge engine design. His bold gamble now is poised to transform UTX’s fortunes and create serious turbulence for the company’s competitors.

The bottom line: There are no sure things in any manufacturing sector, and CEOs committed to remaining on the leading edge can find themselves on the bleeding edge without warning. Even Howard Hughes had a rare flop with the Spruce Goose.

But Chenevert’s GTF appears to have enough power to propel his commercial-aviation strategy to the next level. That and his focus on adding shareholder value should help UTX continue to rise.

At around $81, the stock is up around 21% over its 52-week low last August and has a current dividend yield of 1.8%. Despite trouble in Europe and mixed first-quarter results, UTX is a good long play right now.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/utcs-chenevert-a-big-bet-on-commercial/.

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