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Summary

  • Despite a tough economic climate worldwide, Honeywell generated more than 200% shareholder return since 2009 on the back of consistent improvement in its top and bottom lines.
  • Honeywell’s EPS grew by 11% YoY in 2013 and the company expects the EPS to grow again by more than 10% in 2014.
  • Honeywell’s continued focus on refining its manufacturing processes is paying off, as the company is on a constant journey of improving the margins of its segments.

Honeywell International Inc. (NYSE:HON) is a manufacturing and technology company that produces a variety of commercial and consumer products, engineering services, and aerospace systems. The company has weathered the hostile macroeconomic climate since 2008, and has been reporting impressive top and bottom line results in the last five years. Honeywell announced its Q1 FY 2014 results on April 17th, 2014, beating the estimates, and the company also unveiled its five-year plan in March 2014.

Past Five Years: Robust Growth Even in a Challenging Macroeconomic Environment

Honeywell operates in a host of industries that are impacted by various macroeconomic factors. As the recession loomed in 2008, the stock's price plummeted from more than $60 to less than $30. However, the company has done well to recover from the setback and since then Honeywell has been a story of impressive growth despite depressed global demand.

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Source: Google Finance

Honeywell's share produced 219% total return to shareholders since 2009 which is 1.7 times the S&P 500 index return for the same period. The company was able to increase sales by 30% over the past five years while segment margins increased 300 basis points.

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Source: Honeywell's 2013 Annual Report

What to Expect in 2014

Honeywell cheered up its shareholders when it beat analysts' estimates of its Q1 FY 2014 results. The company recorded an EPS of $1.28 while the expected range was $1.24 to $1.27. On a tax-adjusted basis, EPS was up 10% YoY while sales increased by 4% compared to Q1 FY 2014. Segment margins rose by 30 bps to 16.5% from 16.2%.

Honeywell also revised the lower end of its 2014 EPS guidance upward by $0.05. The company now expects to post earnings per share between $5.40 and $5.55 for full-year 2014. Reuters estimates that for FY 2014 the EPS will stand at $5.54 reflecting a YoY EPS rise of 11.5%.

A segment-wise breakdown of expected sales and margins improvement in FY 2014 is presented below.

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Growth Momentum to Continue in the Next Five Years

Honeywell revealed its five-year targets on March 5th, 2014, as it successfully concluded its previous five-year period which was announced in March 2009. The plan aims to increase sales to over $50 billion by 2018, up from $39.1 billion in 2013. Segment margins are expected to rise to 18.5%-20% from 16.3% during the same period and the company is aiming for double-digit EPS growth each year. The company has around $6.7 billion cash in hand and generated a free cash flow of $3.8 billion in 2013. Honeywell promises to double free cash flow in the next five years and to invest $10 billion to make high-return acquisitions that will boost revenues by $5 to $8 billion.

An Ideal Candidate for Long Term Investment

As far as fundamentals go, Honeywell is brilliant. The company is rich in cash, low on debt levels, generates extraordinary cash flows, and its past and present performance favors its future outlook. The company expects double-digit EPS growth in the next five years and seems well on track to achieving that. The stock also offers a dividend yield of around 2%. Presently, Honeywell is trading at a P/E of 18.1x compared to the industry average of 21.1x. The forward P/E for the share is less than 15x.

Conclusion

Honeywell deserves investors' attention as it has many features of a quality investment. The revenue streams are well-diversified; the company has shown it can endure rough phases of the economic cycles; dividends and EPS have been consistently on the rise; and the company has just laid out a great road map for the next five years. I recommend buying the stock and, assuming the five-year plan sails smoothly, expect the stock to produce a more than 80% return by 2018.

Source: Honeywell International: A Stock Worth Investing In