Seeking Alpha
Recommended for you:
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Honeywell (NYSE:HON) are trading roughly unchanged in Tuesday's trading session. The diversified technological and manufacturing company announced the acquisition of RAE Systems, a manufacturer of a range of gas and radiation detection systems.

The Deal

Honeywell announed that it has agreed to acquire privately held RAE Systems for $340 million. RAE offers personal, hand-held, transportable and fixed gas and radiations sensing and detection devices for the oil & gas as well as industrial markets. RAE's products are sold in over 120 countries to leading multinationals and governments.

RAE's Systems 750 employees will become part of Honeywell Analytics, which in its turn is part of Honeywell's Automation and Control Solutions division.

President of Honeywell Life Mark Levy commented on the deal, "RAE Systems is a pioneer in the gas detection industry with unrivalled technologies. Their strong presence in hazardous material, first responder, and government complements our existing business very well."

RAE generated full-year revenue of $107 million for 2012. As such the price tag values the company at 3.1 times annual revenues. Honeywell furthermore released that the deal values the company at 13 times estimated EBITDA for 2013. Honeywell stresses that the EBITDA multiple is only 6 times, adjusting for expected synergies, implying that the company expects to achieve annual synergies of $30 million.

The deal is subject to ordinary closing conditions including regulatory review. The deal is expected to close in the second quarter of 2013.

Valuation

Honeywell ended its first quarter of 2013 with $5.13 billion in cash, equivalents and short-term investments, giving the company sufficient liquidity to finance the deal. The company operates with $7.70 billion in short- and long-term debt, for a modest net-debt position of $2.6 billion.

Honeywell generated first-quarter revenues of $9.33 billion, up 0.2% on the year before. Net income rose more than 17% to $969 million as the company successfully managed to boost productivity across the board.

Last week,the company slightly revised its full-year revenue target downwards to $38.8-$39.3 billion. As a result of the increased productivity, Honeywell now expects to earn between $4.80 and $4.95 per share, implying that full-year earnings are expected to come in around $3.8 billion.

Trading around $75 per share, the market values Honeywell around $59 billion. This values shares of the company at around 1.5 times annual revenues and 15-16 times annual earnings.

At the moment, Honeywell pays a quarterly dividend of $0.41 per share, for an annual dividend yield of 2.2%.

Some Historical Perspective

Long-term holders of Honeywell have seen decent returns. Over the past decade alone shares have more than tripled, this even excludes dividend income. Shares peaked around $60 in 2008 to fall to lows of $25 a year later during the recession. Shares steadily recovered and are currently exchanging hands at all-time highs of $75 per share.

Between 2009 and 2012, Honeywell increased its annual revenues by roughly a quarter, up from $30.0 billion in 2009 to $37.7 billion over the past year. Net income almost doubled to $2.9 billion in the meantime.

Investment Thesis

Despite the very modest revenue growth, investors are still enthusiastic about the prospects for Honeywell with shares trading around all-time highs.

Investors are applauding the cost savings measures, which the company outlined, in an attempt to cut operating costs by $150 million in 2013. Results are already visible in the first quarter of 2013 as earnings rose sharply on stable revenues.

Shares could further get a boost as a result of recent acquisitions. Last year, Honeywell acquired a 70% stake in Thomas Russell and it acquired Intermec (NYSE:IN).

Honeywell is trading at premium levels despite weak revenue growth, which gets a modest boost from accretive acquisitions including that one of RAE Systems, Intermec and Thomas Russell. Yet earnings could get a boost giving that gross margins rose by 100 basis points to 16.2% in the first quarter. The company has targeted margin expansion to 18% in 2014.

Trading around all-time highs I remain on the sidelines despite the targeted margin expansion. Valued around 15-16 times annual earnings there is little upside given the modest revenue growth. The 2.2% dividend yield is fair as well.

I remain on the sidelines.

Source: Honeywell's Shares Trade At All-Time Highs Following The Purchase Of RAE Systems