Seeking Alpha
, Alex's Twitter (322 clicks)
Long/short equity, research analyst, tech, growth
Profile| Send Message|
( followers)  

Introduction

Honeywell (NYSE:HON) is a diversified scientific/technology company, and is likely to grow earnings going forward. I anticipate Honeywell to break out of its multi-year resistance level in 2013, and trend higher for the next 5-years.

Qualitative Analysis

Source: Information pertaining to Honeywell came from the shareholder annual report and shareholder outlook report

Honeywell remains optimistic on its future performance and anticipates a compounded rate of growth in its revenue by 6-8%. The company plans to improve its profit margins by .25-.28% per annual year. The company is meeting its own expectations.

(click to enlarge)

The company plans on $41-45 billion in sales along with 16-18% net profit margins for 2014.

The Aerospace division is involved with the production and development of auxiliary power units, propulsion engines, electric power systems, engine controls, repair services, among many other services/products related to aerospace and defense. Automation and control solutions division is involved with the production and development of automated energy, safety, and security devices for buildings (along with many other products/services). Performance materials and technologies division is involved with the production and development of advanced materials (resins, advanced fibers, electronic materials, and etcetera). The company's transportation systems division is involved with the development and production of turbochargers, thermal systems, brake hard parts, and other friction materials.

(click to enlarge)

The fastest growing divisions are the performance materials (20% revenue growth) and transportation systems (20.8% revenue growth). The capital expenditures for the transportation systems have gone up the most over the other divisions (cap-ex increased by 49.4%). Honeywell is investing its capital into its fastest growing divisions, implying that the company is flexible and adept at managing its earnings.

(click to enlarge)So as long as Honeywell continues to: invest its capital intelligently, realizes revenue growth, and makes improvements in profit margins, the company will grow earnings. Improving economic conditions, plus share-buybacks further supports the optimism I have for the stock going forward.

Honeywell competes with Danaher (NYSE:DHR), Emerson Electric (NYSE:EMR), Ametek (NYSE:AME), Waters (NYSE:WAT), Illumina (NASDAQ:ILMN), among many others.

Technical Analysis

Honeywell is in a long-term up-trend, and is trading near its multi-year resistance level of $68 per share. The resistance level goes as far back as 1999. I think the stock will break above this resistance level based on technical and fundamental analysis.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, 200-Day Moving Averages. The stock recently broke above the upper tend-line of the symmetrical triangle formation, the 20-Day Moving Average crossed above the 50-Day Moving Average, implying further upside in the stock. The technical analysis supports the buy-thesis in the stock.

Notable support is $52.80, $58.80, and $62.40 per share. Notable resistance is $68.00, $75.00, and $84.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

HON

Industry

Sector

S&P 500

Current Qtr.

3.80%

0.20%

3.50%

9.10%

Next Qtr.

8.70%

28.30%

27.20%

14.60%

This Year

10.60%

16.70%

33.70%

7.20%

Next Year

9.80%

20.30%

-25.70%

12.80%

Past 5 Years (per annum)

6.19%

N/A

N/A

N/A

Next 5 Years (per annum)

10.52%

15.88%

13.82%

9.09%

Price/Earnings (avg. for comparison categories)

14.83

3.48

14.12

12.41

PEG Ratio (avg. for comparison categories)

1.41

-0.97

1.09

1.46

Source: Table and data from Yahoo Finance

The company shows reasonable growth as analysts on a consensus basis have a 5-year average growth rate forecast of 10.52% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

1.04

0.99

1.12

1.14

EPS Actual

1.05

1.04

1.14

1.2

Difference

0.01

0.05

0.02

0.06

Surprise %

1.00%

5.10%

1.80%

5.30%

Source: Table and data from Yahoo Finance

The average surprise percentage is 3.3% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 1.54

21.71

2004

$ 1.45

24.42

2005

$ 1.93

19.30

2006

$ 2.54

17.81

2007

$ 3.35

18.38

2008

$ 1.08

30.4

2009

$ 2.05

19.12

2010

$ 2.59

20.53

2011

$ 2.61

20.82

2012

$ 2.87

22.11

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

(Note: the EPS figures presented are from the GAAP audited income statement and is different from the headline/pro-forma EPS numbers)

The EPS figure shows that earnings grew throughout 2003-2007. Whereas the 2007-2009 period earnings/revenues dropped as the company was adversely affected by the great recession. Once the United States economy exited the recession in 2010-2011 the company earnings have improved.

(click to enlarge)

Source: Chart created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore the largest risk factor to Honeywell is the slowing of international gross domestic product growth. So as long as the world economy continues to grow, the company will generate outstanding returns over a 5-year time span based on the forecast below.

(click to enlarge)

Source: Forecast and table by Alex Cho

By 2018 I anticipate the company to generate $5.33 in earnings per share. This is because of earnings/revenue growth, product expansion, improving global outlook, and cost management.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

(click to enlarge)

Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

HON currently trades at $66.31. I have a price forecast of $68.31 for December 31st 2013. The stock is at fair value, and will trend higher by 2014.

Short Term

Over the next twenty-four months, the stock is likely to appreciate from $66.31 to $75.73 per share. This implies 14.2% upside from current levels. The technical analysis indicates the stock is in a long-term up-trend further backing the buy-thesis on the stock.

Investors should buy HON at $68.31 and sell at $75.73 to pocket short-term gains of 14.2% in 2013-2014.

Long Term

The company is a good investment for the long-term. I anticipate HON to deliver upon the price and earnings forecast despite the risk factors (competition, economic conditions, and commodity prices). Honeywell's primary upside catalyst is international expansion, cost management, product expansion, and share buy-backs. I anticipate the company to deliver upon my forecasted price target of $114.43 by 2018. This implies a return of 72.5% by 2018. When factoring back in the dividends (based on the table below) the company will generate a combined return of 90.9%. This rate of return is reasonable considering the moderate-level of risk (5-year beta of 1.4).

Year

Dividend Yield @ $66.31 per share

Cumulative Total

2013

2.47

2.47

2014

2.68

5.15

2015

2.91

8.06

2016

3.16

11.23

2017

3.43

14.66

2018

3.73

18.39

Source: Forecast and table by Alex Cho, dividend data from shareholder annual report

HON has a market capitalization of $51.9 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

Honeywell is a good investment opportunity, the stock will trade at higher valuations over time.

The conclusion remains simple: buy Honeywell.

Source: Honeywell Will Trade At New All Time Highs By 2014