SIVY ON STOCKS from CNNmoney.com
October 26, 2001

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Parts for planes

Honeywell and United Technologies are key subcontractors for the biggest
defense project ever.

By Michael Sivy

NEW YORK (CNNmoney) - After the market closed on Friday, the Defense
Department announced the winner of the largest military project in history
-- the $200 billion Joint Strike Fighter. This plane will be a mainstay for
three branches of the U.S. armed forces as well as the U.K.'s navy and air
force.

Lockheed-Martin was the big winner -- but it wasn't the only one. Boeing,
which also had bid on the project, will likely make parts of the plane. And
a host of other defense companies stand to benefit from subcontracting
deals. United Technologies is virtually a sure thing, since that company's
Pratt & Whitney division was set to provide engines for both the Lockheed
and the Boeing proposals. Honeywell is also expected to be a major
subcontractor.

Both Honeywell and United Technologies look like irresistible buying
opportunities for contrarian investors with a time horizon beyond three
years or so. The stocks got clobbered after Sept. 11 because both companies
make important components used on commercial aircraft. With airlines
reeling from the drop-off in travel, the near-term outlook for that market
is dim.

 From a longer-term perspective, however, demand for aircraft engines and
subassemblies should be just dandy. Even before the war on terrorism, U.S.
military spending was slated to rise over the next few years. And after the
twin towers fell, another $20 billion was added to the budget for the
current fiscal year.

It's also important to realize that the commercial market won't stay
depressed for more than a couple of years. Reporting its biggest loss ever
on Wednesday, American Airlines' parent AMR said that it had cut back
flights by 20 percent and that it was postponing 29 of the 45 new plane
deliveries scheduled for 2002. Air travel will eventually recover, however,
and planes do wear out. That means that delayed deliveries do have to be
made up within two or three years.

United Technologies (UTX: up $2.54 to $57.01, Research, Estimates) gets 36
percent of its earnings from Pratt & Whitney engines and 18 percent from
Sikorsky helicopters and aircraft control systems. The rest comes from
air-conditioning and elevators. Although the stock price has rebounded from
its lows, it's still down 14 percent from its Sept. 10 close. At a current
$57 a share, the stock is trading at less than 16 times next year's
earnings, which are projected to be down slightly from this year's results.
Over the next five years, however, earnings growth could average as much as
15 percent annually.

Honeywell's (HON: up $1.00 to $30.00, Research, Estimates) outlook is much
the same, although the stock is also reeling from the aftershocks of its
failed merger with General Electric. After the deal was stopped by European
regulators, the stock dropped from $50 to $35. It fell again to $24 after
Sept. 11 before rebounding somewhat.

CEO Michael Bonsignore left Honeywell after the merger failed and previous
CEO Lawrence Bossidy was called back into service. Bossidy is making tough
restructuring moves that are hurting current results but will leave
Honeywell even better positioned for the next upturn in aerospace, which
accounts for 40 percent of Honeywell's sales and an even larger percentage
of earnings. Currently $30 a share, Honeywell is trading at 15 times 2002
earnings, which are expected to be flat with this year's. Long-term growth
is projected at 14 percent annually.

Given the tough times that are likely before aerospace rebounds, it may be
a little bit early for both these stocks. But for an investor with a
long-term time horizon, the P/Es look awfully cheap compared with potential
growth rates.

###

Read all of Michael's columns at:
http://money.cnn.com/markets/sivy/

To subscribe or unsubscribe to Sivy on Stocks, go to:
http://money.cnn.com/email/

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