Honeywell International Inc (NYSE: HON) – A stock guide/review

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by Anonymous

INTRODUCTION:

Good morning/evening everyone. This is the last stock review for the first poll that closed out last week. The current poll just closed and it looks like AT&T took it. So that will be next.

HONEYWELL INTERNATIONAL:

Sector: Industrials

Honeywell operates as a diversified technology and manufacturing company worldwide. It breaks itself down into the following segments:

  • Aerospace segment:

Offers auxiliary power units, propulsion engines, integrated avionics, environmental control and electric power systems, engine controls, flight safety, communications, navigation hardware, data and software applications, radar and surveillance systems, aircraft lighting, advanced systems and instruments, satellite and space components, and aircraft wheels and brakes; spare parts; repair, overhaul, and maintenance services; thermal systems; and connected solutions and data services for the aftermarket, as well as wireless connectivity, and management and technical services.

  • Building Technologies segment:

offers advanced software applications for building control and optimization; sensors, switches, control systems and instruments for energy management; access control; video surveillance; fire products; remote patient monitoring systems; e-cooling heat transfer agents; and installation, maintenance, and upgrades of systems.

  • Performance Materials and Technologies segment:

offers automation control, instrumentation, and advanced software and related services; catalysts and adsorbents, equipment, and consulting; and materials used to manufacture end products, such as bullet-resistant armor, nylon, computer chips, and pharmaceutical packaging, as well as Honeywell forge connected solutions.

  • Safety and Productivity Solutions segment:

provides personal protection equipment, apparel, gear, and footwear; gas detection technology; and cloud-based notification and emergency messaging; and mobile devices and software; supply chain and warehouse automation equipment, and software and solutions; custom-engineered sensors, switches, and controls; and software-based data and asset management productivity solutions.

Strengths:

– Strong record of successful products and brand innovation.

– Automation of activities has enabled the company to scale up/down production based on the demand conditions in the market.

– Strong Free Cash Flow.

– Decent Returns on Capital Expenditure and mergers + acquisitions.

Risks:

– Honeywell International needs to put more money in technology investments to maintain relevancy and innovation edge.

– The company has lost market share in many categories listed above due to strong competition and companies undercutting prices.

– Investment in R&D is below the fastest growing players in the industry.

– Industrials are highly cyclical.

– Honeywell is more subject to fluctuations in the US gov defense budget. (This has been stable, however that is not to say that won’t change in the future)

FINANCIAL HISTORY:

This next section will include information up to their 2019 yearly 10k. However, for 2020 (based on their quarterlies) they definitely haven’t been doing terrible. The Space and Building segments are definitely down, however the Safety and Productions segment has helped buffer the loss during the market downturn. So the diversification into multiple industrial segments has definitely helped them. They have been doing so well over the last decade, in fact, they were reintroduced to the DOW Jones in August. (They were previously removed in 2008).

Year Revenue EBITDA Debt Debt / EBITDA
2011 $36,529 $3,531 $6,896 2
2013 $39,055 $6,490 $7,441 1.1
2015 $38,581 $7,711 $6,113 0.85
2017 $40,534 $8,314 $13,924 1.7
2019*** $36,709 $8,592 $13,191 1.5

Looking here it would seem they have decreasing revenue between 2017-2019, however the decrease there is actually because they sold their Transportations Systems portion of the Aerospace segment into a standalone publicly-traded company (Garrett Motion Inc.), and also part of the Building Technologies to a public company (Residio Technologies Inc), so the decrease in revenue is attributed to those sales. (Item 7 of the most recent 10K, page 17). So if we account for this then Honeywell has definitely been growing revenue over the decade. This can be seen in the earnings which have increased on average 11% YoY.

Debt has doubled, but considering the increase in earnings and revenue, and the low debt to begin with, it isn’t too notable. The Debt/EBITDA ratio here is only about 1.5, so they are definitely not too leveraged. Note, the debt calculations above are short term + long term debt.

Year Cash Flow from Operations Capital Expenditures FCF/E Ratio
2011 $2,830 $789 Million $2,453
2015 $5,519 $1,073 $3,626
2019 $6,897 $838 Million $5,880

Cash flow lines up with with earnings, even accounting for the spin outs mentioned above. The CAPEX is pretty low, it does mean they are generating very good sums of money with the investments they are making, but Honeywell needs to ensure it is investing to maintain competitiveness. Free cash flow is very strong. Based on their sheets, in addition to the dividend, they are using some of this to buy back some shares, 773 to 715 from 2011 to 2019.

LET’S TAKE A LOOK AT THE DIVIDEND AND PRICE/VALUE, AND GROWTH:

Honeywell is a Dividend Achiever that has paid and increased its dividend for 10 consecutive years.

NOTE: Current for December 2020 and very likely to change.

Stock Price $208.22
P/E Ratio 29.91
Current Annual Payout / Share $3.72
Yield 1.79% (Based on Price Dec 2020)
10 Yr Div Growth Rate 10.8%
3 Yr Div Growth Rate 11.1%
1 Yr Div Growth Rate 10%
Current EPS Payout Ratio 48.06%

This will be broken this down from a dividend perspective, and then a value perspective. The dividend growth for the company has been fantastic, consistently at 10% over the entire decade that hasn’t slowed down, plus the payout ratio is a low 48%. Based on their free cash flow this is quite sustainable moving into the future. The CEO has mentioned plans to shift the dividend growth to match growth in earnings (Averaged at ~5%), so this could potentially increase/decrease the growth rate based on those numbers. From a value perspective however, the price of ~208$ is expensive, and some would say overvalued. Because of it’s price, the yield is a low 1.79%. Based on the dividend alone the stock would have been more of a fair value when it was priced closer to 150/160$ (Yield ~2.4%). however there are some arguments against this.

Honeywell has been moving to a more subscription based service with its products, this model has a tendency sharply increase revenue for successful companies with worthwhile products and often causes them to trade at higher P/E and books ratios. In addition to this they are also partnering with Microsoft for cloud services. According to their CEO, Honeywell is aiming to become more of a controls company, using software across industries to control the flow of data. This move and partnerships support the higher price tag for the stock and helps explain why they are trading at a higher ratio, much like tech companies do.

CLOSING THOUGHTS:

All in all, Honeywell is a well run company, they have strong financials, decent diversification, and competent leadership. Whether of not you feel the price is a good entry point depends on whether or not you believe the company should be trading at more a premium based on its financials, products, and future goals. Some would say the rally from ~$104 – $208 (March 2020 – Dec 2020) caps its short term potential and increases its downside. That said, the company’s aerospace segments look strong, and management has a clear pathway to growth through its digital and IoT initiatives.

If you’re not sure but you like the company, add it to a watch list, watch its movements for awhile, check out the news from the company. Take your time to research, investing is not a race, more a journey. And, as always, pease supplement this with your own research. There are more risks that need to be considered, read opposing views. Don’t just read whatever will validate a preformed opinion.

Thanks for reading, and have a good day/night!

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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