Professional traders are always on the lookout for special situations in the stock market. Special situations are far and few between, but they can greatly increase the odds of investing success.
One of the most sought after special situations in the entire stock market is when a company divests or sells off a sector or division to another company.
These divestments are extremely beneficial to both the company doing the selling and the company buying the sector or division.
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The reasons for this are multiple. At the most basic level, the company doing the selling is getting rid of an unwanted division, filling its coiffures with cash and creating the ability to rearrange resources optimally. The company doing the buying benefits from a new line of business, expansion, and overall growth. It can be a win-win situation for everyone involved.
Another corporate action known as a spinoff is also likely to boost share prices. Spinoffs are when a company divests of a division, but that division becomes its own company. Just like in a sale or divestment, spinoffs are generally beneficial for the parent company and the company spun off.
Right now there is a gigantic special situation brewing among two major companies. There are billions of dollars at stake and investors who act have an excellent chance of success.
The special situation I am referencing is United Technologies (NYSE:UTX) divesting of its Sikorski helicopter unit. Right now, it looks like Lockheed Martin (NYSE:LMT) is the most likely purchaser in a deal valued at $8 billion as reported by the Wall Street Journal.
Way back in March, United Technologies announced it would look into strategic changes with its Sikorski unit including a potential spinoff.
Several companies have shown interest in acquiring the Sikorski helicopter unit including Boeing and Textron. However, tax issues stymied most interest in the deal.
Sikorsky is the world’s largest military helicopter manufacturer. The company is most famous for its Black Hawk copters. It sells to the U.S. Military and is the Pentagon’s biggest supplier by value. Sikorsky also maintains a substantial aftermarket business with parts and service contracts.
Founded in 1925 on Long Island, New York, Sikorsky posted $7.5 billion in sales last year. Believe it or not, even at these lofty sales numbers, Sikorsky is United Technologies smallest division by revenue. We are truly dealing with giants here!
The company describes itself as a provider of high technology products and services to the building systems and aerospace industries across the world. United Technolgies operates through five segments: Otis; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems and Sikorsky.
Otis designs, manufactures, sells and installs a range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a line of escalators and moving walkways.
UTC Climate, Controls & Security is a provider of heating, ventilating, air conditioning (HVAC) and refrigeration solutions.
Pratt & Whitney segment supplies aircraft engines for the commercial, military, business jet and general aviation markets.
UTC Aerospace Systems is a global provider of technologically advanced aerospace products and aftermarket service solutions.
Its Sikorsky segment manufactures military and commercial helicopters and also provides aftermarket helicopter and aircraft parts and services.
Should Sikorsky be spun off, it will be its own Fortune 500 company with a market value of approximately $7.5 billion.
The likely acquirer Lockheed Martin describes itself as a global security and aerospace company. It is engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products, and services.
The Company operates in five segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST) and Space Systems.
Lockheed Martin provides a range of management, engineering, technical, scientific, logistics and information services.
The Company’s areas of focus are in defense, space, intelligence, homeland security and information technology, including cyber security.
It serves both the United States and international customers with products and services that have defense, civil and commercial applications.
The Sikorsky deal will be Lockheed Martin’s largest acquisition in two decades. Its largest acquisition was Martin Marietta for $10 billion around 20 years ago.
Due to Pentagon defense spending cuts, Lockheed Martin’s revenues have remained flat over the last five years. Fortunately, growing export sales have worked to counteract the decline in domestic sales.
Lockheed is looking at Sikorsky to provide growth to the company.
It’s important to note that the end of the Afghan and Iraqi wars, as well as, falling crude oil prices due to the slashing of demand for helicopter transport to oil rigs have recently pressured Sikorsky copter sales. Remember, nonmilitary sales make up 30% of Sikorsky’s revenue.
The good news is, and what Lockheed Martin is betting on is the helicopter maker has a $40 billion backlog of orders. In addition, Sikorsky has several new substantial contracts. The contracts include one to provide a new Presidential copter and rescue helicopters for the Air Force. Most interesting is the fact that these contracts were won with a partnership with Lockheed Martin.
Sikorsky is slashing costs by cutting 5.5% of the 15000 employment ranks and 560 outside contractors within the next year. Sales are expected to fall this year but forecasted to ramp to $10 billion over the next decade.
Lockheed is the world’s largest defense company with a market value of around $60 billion. It has a stated goal of morphing into more of a “platform” builder than a provider of communication and weapon parts.
“I’m not going to speculate about what we’re going to do,” said Lockheed Martin Chief Executive Marillyn Hewson, when asked about Sikorsky at an industry conference in New York as reported by the Wall Street Journal.
Lockheed allocated around $900 million on a succession of small purchases last year, but the CEO didn’t eliminate the potential of bigger deals if opportunities arose. She stated, “We have great debt capacity and the company remains committed to returning most of its free cash to shareholders over the next three years.”
These types of deals are often uncertain with much misinformation and unknowns floating about before they actually close. In this case, Reuters reported on Wednesday that Textron (NYSE:TXT) is also in the running to purchase Sikorsky, with a decision to spinoff or sell arriving as soon as the end of July.
How To Play It
The most likely to profit play is to buy United Technologies. The reasons are that the only thing known for certain is that UTX is trying to divest of Sikorsky.
While it appears that Lockheed Martin is the most likely suitor, Textron may also be in the running as an acquirer. In addition, United Technologies may still spin off the Sikorsky unit into its own separate company.
All of these scenarios will be beneficial for the share price of UTX. The unknown is what one will actually take place.
The stock market has already started to reward owners of UTX shares due to the Sikorsky divestment.
Share price bounced hard from the $108.00 per share lows. Shares have hit a recent high of $112.00 per share and are setting up to challenge resistance at the 200 day simple moving average at $113.22 per share.
Buy now between $111.00 and $112.00 per share to catch the upside momentum triggered by the Sikorsky divestment.