Honeywell International (HON) is described as an industrial conglomerate. It manufacturers such things as: airplane controls, engines, turbo chargers for cars, industrial automation and control systems, as well as air conditioning systems. Its two largest segments are Aerospace which brings in 35% of its revenue and Automation and Control that generates 40%. Together, these two segments bring in 75% of the company's total revenue.
Honeywell has some challenges ahead in its global market. Even though it is expected to see a decline in 'developed' country personnel and a slow down in emerging market development, two financial firms (Bank of America and Sterne Agee) are bullish on the company. Based upon Honeywell's projected 2012 guidance and projected growth through 2014, both firms agree with Honeywell's plans. Bank of America even gave kudos to its management in a statement when it said:
"We believe that internally the company is looking at its profit trajectory through to 2017. In turn, this suggests a relatively high degree of management confidence toward achieving its 2014 targets even though the company needs to continue to execute on reducing its overhead costs, in our opinion."
One of the innovating services Honeywell is introducing worldwide is called Attune Advisory Services. This is a cloud-based service technology aimed at helping companies cut operating costs by reducing utility costs by up to 20%. Considering 40% of energy costs used by countries tend to come from buildings, there is a potential for huge savings here. One unique feature about this service is the extent to which it operates.
Most management software typically provides a stream of data, but Attune Services does much more. It provides data to help facility managers to build a base line for efficiency upgrades. But it also delivers actionable recommendations backed by its detailed data collection. The goal is a (10%-20%) energy savings, and possibly more in older buildings. Honeywell is providing this service to over 3000 sites globally.
With the high quality of management in place and services like the Attune Advisory Service, we believe Honeywell International is an excellent candidate for long term growth. At the same time, we enjoy looking for opportunities to make money short term using various option strategies. Analysts believe the company can continue to grow up through 69 while it presently trades as 59.56. We would initiate a Bull Call Spread.
The Options Play
- Buy a January 2013 '60' call option (priced at $4.80)
- Sell a January 2013 '62.5' call option (priced at $3.50
- Net Debit to Start: $1.30
- Maximum Profit: $1.20
Reasoning behind the Trade
- Analysts are confident in Honeywell's management to reach certain its targeted levels of growth through 2014.
- January 2013 gives about the same profit potential as September, so the added time element gives us added protection and possibility of reaching these levels.
- We are well within the projected price range of the company's 52 week target.