In this article, let's take a look at Honeywell International Inc. (HON, Financial), a $79.59 billion market cap company that is the world's largest maker of avionics, small jet engines and climate and process control equipment.
Diversified revenue base
More than half of sales came from products sold outside the U.S. Markets are concentrated in Europe, Asia and Latin America. The U.S. government accounted for 10% of 2013 sales, and sales to the U.S. Defense department were 8% of the total.
It operates through four operating segments: the Aerospace segment (31% of 2013 revenues), the Automation and Control Solutions segment (42%), the Performance Materials and Technology segment (17%) and the Transportation Systems segment (10% and 7%)
The major segment
The leading position in the Aerospace and Automation and Control segment will make the firm to benefit from a positive demand in the upcoming future. The reason why the Automation and Control Solutions segment has grown in the recent past was the expansion to different types of end markets, making important investments in this segment.
Attractive dividend policy
The firm has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 1.8%, which is not considered enough to protect the purchasing power, but we expect to rise in the future, in line with EPS growth that we are going to analyze next. For the five years through 2013, the company recorded compound annual growth rate (CAGR) of about 7% for dividends per share.
Revenues, margins and profitability
Looking at profitability, revenue grew by 4.77% and led earnings per share increased in the most recent quarter compared to the same third-quarter a year ago ($1.47 vs $1.24). During the past fiscal year, the company increased its bottom line. It earned $4.92 vs. $3.70 in the previous year. This year, Wall Street expects an improvement in earnings ($5.55 vs. $4.92). The net income increased by 17.9% when compared to the same quarter one year prior, from $990.00 million to $1,167.00 million.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| HON | Honeywell International | 24.04 |
| TXT | Textron Inc. | 12.92 |
| BA | Boeing Co. | 38.95 |
| LMT | Lockheed Martin Corp | 80.40 |
| RTN | Raytheon Co | 20.01 |
| Â | Industry Median | 7.92 |
The company has a current ROE of 24.04% which is higher than the one exhibit by Textron (TXT, Financial) and Raytheon (RTN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Boeing (BA, Financial) could be the option and Lockheed Martin (LMT, Financial) has a very attractive level.
It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 19.1x, trading at a discount compared to an average of 24.3x for the industry. To use another metric, its price-to-book ratio of 4.2x indicates a premium versus the industry average of 1.92x while the price-to-sales ratio of 2.0x is above the industry average of 1.08x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $26.459, which represents a 21.5% compound annual growth rate (CAGR).
As we can appreciate, the stock has demonstrated a pattern of positive earnings per share growth over the last years, as well as a good improvement in its price.
Final comment
As outlined in the article, the firm’s diversification across end markets as well as the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock. Further, it has been steadily improving operating margins which we think it is crucial for good income statement results.
Hedge fund gurus like Scott Black (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
