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Here is a look at how Honeywell International, Inc. (NYSE:HON) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$51.78
MG OpinionOvervalued
Value Based on 3% Growth$52.62
Value Based on 0% Growth$30.84
Market Implied Growth Rate8.14%
Net Current Asset Value (NCAV)-$0.13
PEmg24.78
Current Ratio1.32
PB Ratio471.62

Balance Sheet - 9/30/2013

Current Assets$19,304,000,000
Current Liabilities$14,663,000,000
Total Debt$5,789,000,000
Total Assets$44,406,000,000
Intangible Assets$15,820,000,000
Total Liabilities$29,447,000,000
Outstanding Shares78,467,000,000

Earnings Per Share

2013 (estimate)$4.91
2012$3.69
2011$2.35
2010$2.61
2009$2.85
2008$3.76
2007$3.16
2006$2.51
2005$1.86
2004$1.49
2003$1.56
2002-$0.27

Earnings Per Share - ModernGraham

2013 (estimate)$3.63
2012$3.01
2011$2.76
2010$2.97
2009$3.04
2008$2.95

Conclusion:

Honeywell International Inc. is a good company that just misses the mark for both the Defensive Investor and the Enterprising Investor. The company does not have a strong enough current ratio, and is trading at too high of PEmg and PB ratios for the Defensive Investor. For the Enterprising Investor, the company holds too much debt relative to its current assets. From a valuation side of things, the company has exhibited some growth in EPSmg (normalized earnings), going from $2.95 in 2008 to an estimated $3.63 for 2013. However, the market is currently implying a growth estimate of 8.14%, which is higher than has been seen historically. As a result, Honeywell would appear to be overvalued at the current time.

Disclaimer: The author did not hold a position in Honeywell International Inc. (HON) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Honeywell International