Honeywell International Inc. (NYSE:HON) posted second quarter (ending June 30, 2014) earnings that were neither exciting nor discouraging to make an investment in the stock. Net sales improved by 6% in the second quarter of 2014, compared with same quarter previous year, which beat analyst estimates by $60 million. Honeywell reported EPS of $1.38 for the second quarter, which improved from $1.28 from the same quarter previous year, a growth of 8%. The company beat analyst estimates of EPS by $0.01.
Honeywell operates its businesses in four segments, out of the four, Automation and Control systems reported greater growth in sales, up by 10% compared with same quarter previous year. Segment Profit wise Transportation systems posted 33% growth.
From the valuation point of view, the stock is trading at higher valuation, 19.52 [ttm] times of earnings, 4.24 (mrq) times of book value, 1.92 times of sales; the company has long-term debt of $6,839 million. Considering the size of Honeywell, it is not possible to expect better results than it posted recently to justify the higher valuation or to give more room for growth in stock price. At the same time, I do not see any major downside to the stock in the near future as long as the global economy is expanding above 3% to 3.5% as the management mentioned in the recent earnings call. The global economy is expected to expand by 3.6% this year and 3.9% in 2015. In addition, it seems like there is no major threat to this growth expectation to cause any significant decline in the near future.
While it is not possible to expect significant growth (like 25% - 50%) in the stock price in the one-year period because of the company's non-growth-stage nature. However, the stock has the potential to deliver slow and steady share price growth (in the range of 10% - 24.99% per year) in the next five years as the company executes its next five-year plan. Honeywell is aiming to take the total company sales to over $50 billion by 2018 that is approximately 25% growth from the full year 2014-guided sales range of $40.2 - $40.4 billion.
The top management's priority is growth driven by excellence, which is the foundation for long lasting growth. In my view at the size Honeywell, many companies choose to focus on cost cuttings, acquisitions and introducing new product or service (also updating products and services) these are all normal actions of companies to grow. However, Honeywell also chooses to improve user experience at this stage, where the earnings growth is very slow. The company is going to introduce Honeywell User Experience (HUE), a new approach to the design and development of new products and services, the company has other process enablers. This kind of process will increase the brand value and customer loyalty, and the result will be much better sales.
Keeping in mind the valuation, slower growth and the management of Honeywell, whose priority is growth driven by excellence; I would invest in this company if my return expectations were low and if I am ready to stay invested for at least three years.
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