3 Reasons United Technologies Corporation's Stock Could Fall

With annual revenues north of $64 billion, United Technologies Corporation is one of the biggest players in the Aerospace and Defense Products and Services industry (a subset of the broader Aerospace and Defense industry ). But bigger isn't always better.

Put in context, "UTC," as it's commonly abbreviated, lies somewhere in between Boeing and Lockheed Martin in size. But United Technologies is a much more diversified business than either of these aerospace peers. In fact, only about 54% of its revenues derive from aerospace products at all -- and UTC's biggest revenue generatoris its Climate, Controls & Security division, which makes HVAC, fire sprinkler systems, alarms, and video surveillance for buildings.

Result: The same cutbacks in global defense spending that have affected revenues at Boeing and Lockheed Martin affect United Technologies' more diversified business less. But that doesn't mean the stock is totally immune to downdrafts. Today, we're going to take a look at three things that could potentially have a negative effect on United Technologies' stock price, starting with...

Lockheed Martin's F-35 fighter jet. Photo: Lockheed Martin .

Reason No. 1 to be cautious about United Technologies' stock price is exactly what you think it would be: the June 23 incident in which a UTC-built F135 engine, powering a Lockheed Martin F-35 fighter jet, caught on fire -- severely damaging the plane.

UTC is believedto charge the Pentagon anywhere from $14 million to $34 million per F135 engine (with F135-PW-600 engines for the short take-off and landing USMC-variant F-35B costing about twice the price of an ordinary F135 engine). The average cost at present is working out to be about $29 million per unit -- or about 19% of the costof the entire plane.

Now, June featured the second such incident with the F135 engine, and subsequent investigations revealed several more planes were at risk of experiencing at least "mild rubbing" between their "integrally bladed rotors" and the engine casing, which could cause excessive friction.

Worries about the quality of the F135 engine's construction have some Congressmen on Capitol Hill wondering if they might want to have General Electric build an alternate engine for the F-35 fighter . So far, only two instances of serious trouble with the new engine probably aren't enough to justify spending the billions of dollars it would cost to develop an alternate engine. But further incidents could change this calculus.

With 3,000-odd F-35s expected to be built and engined by UTC over the next 60 years, we're looking at as much as $87 billion in potential sales revenues (let alone maintenance and upgrades and replacements) put at risk by this issue with the F135 engine. For now, it's not a reason to sell the stock. But it is a reason to keep a close eye on how the F135 story plays out.

Speaking of General Electric, one month ago, shares of GE were selling for $27and change. Today, they fetch less than $26. Part of the reason for the drop, one imagines, was GE's decision to sell its storied Appliances division to Electrolux for just $3.3 billion -- a price less than half what GE once thought the division was worth .

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3 Reasons United Technologies Corporation's Stock Could Fall