Seeking Alpha
Value, long only, debt, research analyst
Profile| Send Message| ()  

For investors looking for a large-cap company with a history of dividend increases coupled with long-term growth potential, Honeywell International (HON) is a company worth further investigation

Honeywell International, Inc. is a technology & manufacturing company, which serves customers with aerospace products & services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, chemicals.

In the section below, I will analyze aspects of Honeywell's past performance. From this evaluation, we will be able to see how Honeywell has fared over the past four years regarding their profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $2.022 billion
  • Net income 2011 = $2.067 billion
  • Net income 2012 = $2.926 billion
  • Net income 2013 TTM = $3.228 billion

Over the past four years, Honeywell's net profits have increased from $2.022 billion in 2010, to $3.228 billion in 2013 TTM, which represents a 59.64% increase.

  • Operating income 2010 = $3.134 billion
  • Operating income 2011 = $2.686 billion
  • Operating income 2012 = $4.226 billion
  • Operating income 2013 TTM = $4.611 billion

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, Honeywell's operating income has increased from $3.134 billion to $4.611 billion in 2013 TTM. This represents an increase of 47.13%.

ROE - Return on Equity

As shareholders' equity is measured as a firm's total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders' equity. The return on equity measures a company's profitability by revealing how much profit it generates with the amount shareholders have invested.

Net Income / Shareholders' Equity

  • 2010 - $2.022 billion / $10.666 billion = 18.96%
  • 2011 - $2.067 billion / $10.806 billion = 19.13%
  • 2012 - $2.926 billion / $12.975 billion = 22.55%
  • 2013 TTM - $3.228 billion / $14.959 billion = 21.58%

Over the past three and a half years the ROE is showing improvement. Since 2010 the ROE has increased from 18.96% to 21.58%. As the ROE has increased over the past four years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested, thus indicating an increase in shareholder value.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2010 = $37.834 billion
    • Total assets 2011 = $39.808 billion.
    • Total assets 2012 = $41.853 billion.
    • Total assets 2013 TTM = $44.406 billion.
    • Equals an increase of $6.572 billion
  • Total liabilities

    • Total liabilities 2010 = $27.168 billion
    • Total liabilities 2011 = $29.002 billion
    • Total liabilities 2012 = $28.878 billion
    • Total liabilities 2013 TTM = $29.447 billion
    • Equals an increase of $2.279 billion

Over the past three and a half years, Honeywell's total assets have increased by $6.572 billion, while the total liabilities have increased by $2.279 billion. This indicates that the company's assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2010 = $15.011 billion
    • Current assets 2011 = $16.134 billion
    • Current assets 2012 = $17.598 billion
    • Current assets 2013 TTM = $19.304 billion
  • Current liabilities

    • Current liabilities 2010 = $11.717 billion
    • Current liabilities 2011 = $12.275 billion
    • Current liabilities 2012 = $13.045 billion
    • Current liabilities 2013 TTM = $14.663 billion
  • Current ratio 2010 = 1.28
  • Current ratio 2011 = 1.24
  • Current ratio 2012 = 1.35
  • Current ratio 2013 TTM = 1.32

Over the past three and a half years, Honeywell's current ratio has remained relatively even. As the current ratio is currently above 1, this indicates that Honeywell International would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 774 million.
  • 2011 shares outstanding = 792 million.
  • 2012 shares outstanding = 792 million
  • 2013 TTM shares outstanding = 784.67 million

HON Shares Outstanding Chart

HON Shares Outstanding data by YCharts

Over the past three and a half years, the number of company shares has increased. The company shares have increased from 774 million to 784.67 million.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $7.851 million / $33.370 billion = 23.53%.
  • Gross margin 2011 = $7.973 billion / $36.529 billion = 21.83%.
  • Gross margin 2012 = $9.374 billion / $37.665 billion = 24.89%.
  • Gross margin 2013 TTM = $9.816 billion / $38.249 billion = 25.66%.

Over the past four years, Honeywell's gross margin has increased. The ratio has increased from 23.53% in 2010 to 25.66% in 2013 TTM.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $33.370 billion
    • Revenue 2011 = $36.529 billion
    • Revenue 2012 = $37.665 billion
    • Revenue 2013 TTM = $38.249 billion
    • Equals an increase of 14.62%.
  • Total Asset growth

    • Total assets 2010 = $37.834 billion
    • Total assets 2011 = $39.808 billion.
    • Total assets 2012 = $41.853 billion.
    • Total assets 2013 TTM = $44.406 billion
    • Equals an increase of 17.37%.

Over the past three and a half years the revenue growth has increased by 14.62% while the assets have increased by 17.37%. This is an indication that the company from a percentage point of view has been slightly less efficient at generating revenue with its assets.

Based on the information above we can see that Honeywell International has had a very strong 4 years. The net income over the past three and a half to four years, have increased by 59.64%, the ROE has increased from 18.96% to 21.58% in the same time period. The company's assets have increased by 6.572 billion while the liabilities have increased by $2.279 billion. All these metrics indicate that Honeywell is gaining strength.

Moving Forward - China A Key Driver for Growth

With the global middle class population expected to increase from the current amount of 1.8 billion to almost 5 billion by 2030, Honeywell is well situated to capitalize on the needs of this growing trend. As more people drive cars, travel by air, own homes and establish new communities, they will need products that aid them in living this lifestyle.

As the middle class population is expected to increase significantly in China over the next 15 years this presents exceptional opportunities for Honeywell International. Because Chinese companies have been increasingly aligning with U.S. multi-national corporations this opens up the door for growth in this emerging market. Honeywell expects the majority of its Chinese growth to come from tier 2, 3 and 4 cities (Cities with 1 million people or more).

In Support of the Chinese growth, Honeywell announced they will establish a new manufacturing campus in Zhangjiagang, China. This manufacturing campus will be designed to support growing demand in Asia for energy technology and advanced materials.

In the short-term Honeywell's management doesn't expect extensive growth in China as CFO Dave Anderson stated: It wouldn't be surprising to us if China didn't break 7% GDP growth in 2013, Our expectation is that there's going to be relatively muted growth overall".

Having stated that long-term fundamentals support steady growth in China over the next few years, with Citigroup (C) stating: "After last year's slowdown, we continue to expect China's economic growth to level off at 7-8% this year (2013) and 7-7 1⁄2% per year in 2014- 2017, reflected in ongoing rapid productivity gains."

Analysts' Estimates

Analysts at the Nasdaq are estimating an EPS for FY 2013 at $4.95 while the EPS is expected to increase in FY 2014 to $5.56.

Bloomberg Businessweek supports this idea, as it expects the company's revenues to be around $38.9 billion for FY 2013 and increase to $41.1 billion for FY 2014.

Dividend

As Honeywell is committed to paying a sustainable and steadily increasing cash dividend over time, the chart below indicates the company is doing as it states.

HON Dividend Chart

HON Dividend data by YCharts

Currently, with a dividend ratio of 41.08%. As the company's prospects look positive moving into 2014 the results should yield an EPS that is expected to be $5.56. The future for the dividend growth looks to be strong and the company should be able to increase the dividend faster than inflation or the 10-year bond which is currently 2.84%.

HON Payout Ratio (<a href=

HON Payout Ratio ((TTM)) data by YCharts

Price Targets

  • Finviz has a price target for Honeywell International at $92.83.
  • Nasdaq has a price target for Honeywell at $93.00 for FY 2014.
  • Based on a WACC of 6.78% and using the DCF formula I have a target of $97.48.

The above analysis reveals that Honeywell International has had a very successful four years. This success looks to continue as growth in emerging markets such as China look to be a catalyst for the company. Because of global market demand revenues projections are estimated around $38.9 billion for FY 2013 and increase to $41.1 billion for FY 2014. As this is the case, analysts are estimating that Honeywell's EPS for FY 2013 will be $4.95 while the EPS are expected to improve to $5.56 in FY 2014. Based on this information, Honeywell should be able to maintain its history of dividend increases. Over the long-term as middle class populations increase especially within the emerging markets and the demand for this lifestyle also increases, Honeywell is in a great position to capitalize on this growing trend.

Source: Honeywell: Look For Significant Growth Overseas