Seeking Alpha
Growth at reasonable price, mutual fund analyst
Profile| Send Message| ()  

Honeywell (HON) is a Fortune 100 diversified technology and manufacturing leader serving customers worldwide with aerospace products and services, control technologies for buildings and homes along with performance materials. In its latest quarterly earnings release the company promised good prospects as margins in mostly all the departments were positive.

Besides slow growth of sales in the defense and space business, Honeywell was experienced better performance than its peers. Not only this, Honeywell's strong performance over the last two years was driven by growth in almost all of its segments and has beaten analysts' EPS consensus for four straight quarters in a row!

(click to enlarge)

Source: Morningstar

The modest but steady economic growth has caused the company's stock price to jump by more than 60% in the last two years to $88 in November. It has even managed to double the Dow's return over this time frame while competitors such as General Electric (GE) and United Technologies (UTX) have just been able to outperform the index.

Expansion in China

Honeywell plans to expand its operations within China owing to growing demand in Asia for its energy technology and the advanced materials made by its PMT segment. The company recently announced that it would build its first manufacturing facility in China.

The initial phase of the expansion will include building a production facility for advanced catalysts for Honeywell's Oleflex technology that is used to produce propylene, a plastics building block. By licensing Oleflex technology to 19 Chinese producers over the past three years during a period of tightening propylene supplies has allowed Honeywell to benefit from strong demand for propylene and isobutylene. Compared with alternative technologies offered by its peers, Oleflex technology offers higher yields, lower production costs and higher investment returns which have made Honeywell's product a good penetration and profit seeker for the company in the region.

The expansion also supports Honeywell's growing PMT segment as seen in the latest earnings release. Of its four business segments, which include aerospace, automation and control solutions, PMT and transportation, PMT saw the largest year-over-year sales growth. Though much of the 10% growth in the quarter compared to Q3 of 2012 was due to Honeywell's acquisition of Thomas Russell, in the future these offered licenses are likely to increase contribution to profits.

Completion of Telemec Acquisition to Bring $800 Million in Sales

Also, this quarter, Honeywell completed its acquisition of Telemac which provided products such as mobile computing, voice-enabled workflow, data-collection and printing solutions. The acquisition has added new products and solutions to Honeywell's database. Plus, the added engineering expertise along with the global sales channel previously held by Telemec will now add $800 million annually to Honeywell's sales beginning next year.

Honeywell's Performance This Quarter

Honeywell reported strong performance this quarter due to management's focus on boosting profit margins across the business. Revenue grew by 3.3% compared to last year but operating profits grew by 9.5%! This was been the result of greater productivity and a favorable product mix. Similarly, EPS grew by 10% after normalizing it for tax to $1.24 in the last quarter.

The favorable mix further added to Honeywell's order book. Last month, Honeywell received a 5 year $500 million contract to sell spare parts to support various weapon systems including aircraft, engines and helicopters to the US government. This was seen as a ray of hope when budget cuts are harming all the players in the defense industry.


The aerospace segment's margins improved by 110 basis points to 20.2% despite a 3% fall in revenue this quarter year on year. The improvement came from higher sales of large commercial jets and healthy demand for mid to large business aircraft. Commercial aftermarket sales were up 5% in the quarter driven by improving flight hour trends, repairs, upgrades and modification revenue. However, the Defense & Space segment's sales were down 11% due to the budget cuts of the US government and political closures.

Taking that into account, the future prospects of this segment depends primarily on the commercial jet business. Even though the business is improving due to greater orders with airlines such as Boeing, the surplus inventory market of spare parts and products presently offered by Honeywell does not allow the company to benefit from this improvement. However, the future of this department will further improve once held inventory clears out and new orders begin pouring in.

The PMT segment has a promising future as Honeywell's expansion into China will directly benefit the segment. Sales improved by 10% this quarter; however, inflation and investments in China led to margins improving by a mere10 basis points. It is expected that margins will increase as investments begin reaping returns.

ACS Segment Finanicals

Source: ACS Revenue and Margin, Presentation

The ACS segment's high residential end market demand and expansion in China will also continue to boost profits for this segment as total sales increased by 4%. Organic sales contributed 3%and margins jumped by 90 basis points to 15% due to growth investments. Orders backlog also increased by 7% and will be fulfilled in the future. The ACS segment has seen increasing sales in the past along with higher margins and strong backlog. Despite slowing US orders, investments and increasing global demand will benefit ACS in the future.

The transportation segment has also improved due to strong gas demand globally as sales went up 5% organically in the quarter driven by new launches and higher US& China turbo gas penetration. The transportation segment's margins were up by almost 200 basis points to 14%last quarter. Slightly better sales performance in the future could add to profitability as auto production increases and turbo unit shipments rise.


Honeywell is operating at strong margins within most of its segments. Current expansion, increasing backlogs and gas revolution is providing support for growth. In 2014, management expects to remove another $125 million in costs. Even though some may argue that Honeywell is trading at a higher price than its competitors, considering the future potential and further increase in stock price anticipated, I recommend investors to consider buying this stock.

Source: Honeywell Proves To Be A Sweet Prospect!