Cramer: I Would Own Either of United Tech or Rockwell Collins, Or Both

 | Aug 07, 2017 | 7:26 AM EDT
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ba

United Technologies (UTX) can afford to pay a lot more for Rockwell Collins (COL) than the stock's current price, given that the stock's been under pressure versus the group for ages.

I stress "versus the group" because, even though the stock is up more than 30% over the last year, that's still slower than Boeing's BA stock and it's only at 19 times earnings, despite an order book that's full and the great secular trend of aircraft building.

Boeing (BA) , by contrast, sells at 23 times earnings.

Some of that relative weakness is self-inflicted, a slowdown from plus 14% in 2014 down to 0.3% in 2016. But many in aerospace didn't care for its recent acquisition, B/E Aerospace, the world's leading manufacturer of air cabin and interior products from seating to lighting to oxygen systems.

That deal gave Rockwell Collins a much broader product portfolio. Before the $6.4 billion cash and stock deal, the company was mainly focused on the brains of airplanes, as we told viewers recently on Mad Money. Avionics and electronics were its stock in trade.

"This transformational acquisition is consistent with our strategy to accelerate growth and build value through market-leading position in cockpit and cabin solutions," said Chairman and CEO Kelly Ortberg at the time. "We see tremendous opportunity to better serve our commercial aviation, business and military customers through broader offerings."

"B/E Aerospace has a leading position in nearly all the segments it serves and a highly visible, long-cycle backing. Beyond new aircraft delivers, its $12 billion installed base provides a strong flow of aftermarket retrofit opportunities that balances our current cyclical exposure to OEM production rates."

I think that deal actually may have clinched the interest of United Technologies as it needs to get an even bigger part of the plane that it currently has now, with an emphasis on the competitive turbine market and, as well as air management systems, electric systems, wheels and brakes and landing gear.

More important, as we heard from Boeing, the growth in aerospace is accelerating. That last quarter was extraordinary, and seemed to befuddle many analysts, who were under the impression that the growth here may be more cyclical and choppy.

It's anything but.

Rockwell Collins only closed on B/E Aerospace three months ago. The combined company has a huge backlog, strong customer relationships and a terrific patent portfolio that makes it harder for competitors from coming in.

So, there are a ton of synergies and lots of strength brought from the deal.

I am a huge fan of United Technologies and the badly-needed discipline that CEO Greg Hayes has brought to the firm. He has taken out costs and boosted margins, but there's a clear need for more growth, given that the Otis and Climate Control divisions have been kept back by new construction worldwide.

Buying Rockwell Collins might immediately boost the 18 PE of UTX, even if Hays ends up paying $140, which is what it might take to get the company.

I would own either, or both. Yes, the aerospace business is that good -- in many ways much better, consistent and faster growing than almost all of tech -- and there's a developing scarcity of great aerospace plays. A deal here would make them even more scarce ... and more valuable.

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