Honeywell International Inc. (HON) has been the focus of many recent analyst reports. The company deals in a variety of industrial products and solutions ranging from the aerospace and automotive industries to technologies related to building and construction all over the world.
The company recently reported its Q4 fiscal year 2013 results so I will have a brief look at these figures in this article. I will also discuss the company's full fiscal 2013 results compared to the previous year but my article will focus more upon the company's future outlook. In order to determine whether or not this company is a profitable opportunity for investors I will consider the on-going and recent favorable activities initiated by the company as well as future growth from the industry.
To begin, I will first analyze the company's segments that contribute to its revenue growth along with an overview of the company's revenue performance.
Q4 and Fiscal 2013 Top Line Overview and Growth Drivers
The company has disclosed a turnover of $10.39 billion for Q4 fiscal year 2013. This figure reflects an increase of 8.4% from 4Q2012's figure. The company's Q4 fiscal year 2013 revenue has also beaten the consensus estimate of $10.19 billion. In order to further analyze revenue I will conduct a segmental analysis to determine the major revenue generating segments of the company.
Source: HON 10K Report and Presentation
From the table above it is evident that automation and control solutions generate around 42% of the total revenue earned by the company from 2010-2012. This is followed by the aerospace segment that has been recording a decline in revenue contribution and growth as it generated 30.7% of company's total revenue in 2013 compared to 33% in 2010. The company's performance materials and technologies segment recorded the highest revenue growth of 9.4% in 2013. The transportation segment contributed the least to the company's aggregated revenue but recorded a 5.4% growth in its revenue for the current year. I will now determine the future outlook of these segments. Through this, we will be able to determine whether or not these segments will continue to generate revenues in the future.
Future Outlook of Revenue Drivers
Aerospace Segment's Growth Derived from Overall Recovery in the Industry
This segment of the company deals with products related to air transport, aviation, defense and space. According to Deloitte, Global Aerospace and the Defense Industry is expected to record a revenue growth of 5% in 2014. This will mainly be led by double-digit growth in the commercial aerospace industry as the defense sector is expected to record a decline.
By 2023, a significant rise of 25% in commercial aircraft annual production levels is being anticipated and the growth trend has been portrayed in the graph above. As far as the defense sector is concerned an increase in defense spending in the Middle East, China, Japan, South Korea and Brazil will offset a bit of the decline in global defense spending due to military operations in Iraq and Afghanistan. The commercial segment was previously hurt by the global economic slowdown but as the world has started recovering from the slump the segment will receive a boost. This can be seen in the company's current backlog and orders.
Automation and Control Solutions' Growth Derived from Overall Recovery in Industry
This segment offers energy, safety and security solutions for homes, buildings as well as industrial plants. The rise in construction activities and growth in buildings will derive growth for the automation and control solutions segment of the company so I will turn my focus upon the outlook of the global building and construction industry.
Government spending, economic and population growth and urbanization will be the drivers for the upcoming growth of this industry. Due to growth in these sectors, the global construction market is forecasted to reach a worth of $15 trillion by 2025. China, India and the US will contribute 60% to this overall global growth.
Performance Materials and Technologies' Growth Derived from Innovation as per Market Trend
This segment provides advanced materials in the form of chemicals and technologies to various industries. The recently formed partnership will benefit the company in boosting the sales derived from this segment.
Partnership to Cater to Emerging Demand For New Refrigerant with Lower Global Warming Potential
The company recently became a partner of the Japanese manufacturer Asahi Glass Company Ltd to manufacture more environmentally-friendly automobile refrigerant. This type of technology has been witnessing increased demand due to environmental and global warming concerns all around the world. The new technology that the company will be supplying is the HFO-1234yf model that has a 99.9% lower global-warming potential in contrast to the technology presently in use. The production of new refrigerant is expected to begin mid-2015. Environmental laws will also oblige consumers to install this technology such as the EU MAC Directive that aims to lessen greenhouse gas emissions of air-conditioning systems in passenger cars and light commercial vehicles. Auto manufacturers in the U.S. are also embracing HFO-1234yf to conform to Corporate Average Fuel Economy (CAFE) and vehicle greenhouse gas standards. The objective of these initiatives is to improve the average fuel economy and reduce greenhouse gas emissions associated with cars and light trucks. So, Honeywell along with its suppliers will invest $300 million to enhance capacity for the technology's production.
Around half a million cars on the road now-a-days safely use HFO-1234yf and up until 2014 the number of vehicles is anticipated to pass 2 million. As a result of the company taking the initiative to work with changing consumer preference this segment is likely to improve in the future.
Transportation Systems' Growth Derived From Rising Demand for Turbochargers
This segment deals in turbochargers, thermal systems and other friction materials used in vehicles. When installed in engines turbochargers boost a vehicle's efficiency and create an enhanced power output. This addresses the rising consumer concerns for fuel economy as well as controlling CO2 emissions. The market volume of turbochargers is predicted to be 39.45 million units by 2017 mainly led by demand growth from Europe. Honeywell is regarded as a key player in this industry and will continue to grow.
Bottom Line to Perform Even Better
The preceding information dealt with the growth prospects of the company's top line. Now, I will briefly discuss the company's bottom line performance.
The company's growth in this quarter's net income will amaze you because it recorded an increase of 13% in contrast to the previous fiscal year's Q4. This resulted in EPS $0.03 ahead of Wall Street's estimate of $1.21 for the quarter. Margins improved due to the fine-tuning of internal operations.
Source: Company Presentations
From the table above, you can observe a positive change in the basis points of the segments' margins year-over-year with the exception of the transportation systems segment in 2012. This has allowed the company to attain an attractive EPS growth. Overall, the company had a very prosperous fiscal year 2013. Revenues increased by 4% in fiscal year 2013 compared to the previous year while EPS reached $4.97 reflecting an increase of 11% compared to fiscal year 2012 and also ahead of the $4.95 EPS expectations made by analysts. Looking ahead, the company has not exhausted its opportunities to gain more margins. The company has initiatives to reduce its costs and plans to switch to smaller and more efficient facilities in terms of energy utilization as well as other operational matters.
Targets Ahead and Conclusion
Honeywell outdid the industry during the dark days of the economic downturn so it is justifiable to keep an optimistic view regarding the company's upcoming performance and position. The company plans to grow its EPS by 8-12% on the back of the 3-4% sales growth in fiscal year 2014. Argus has recently set a price target of $99-101 for Honeywell's stock regarding it as a buy. Analysts at Langenberg & Company also changed their ranking of Honeywell's stock from hold to buy increasing their price target for the stock from $90 to $100. Zacks has a price target of $94 for the company's stock. The stock is currently trading around $89.74 so there is still a chance to make capital gains from buying the stock.