Earnings Analysis: Honeywell International

| About: Honeywell International, (HON)

Honeywell International Inc. (NYSE:HON) recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Honeywell International Inc.'s analysis versus peers uses the following peer-set: United Technologies Corp. (NYSE:UTX), Boeing Co. (NYSE:BA), Emerson Electric Co. (NYSE:EMR), Lockheed Martin Corp. (NYSE:LMT), Rolls-Royce Holdings PLC ADS (OTCPK:RYCEY), BAE Systems PLC (OTCPK:BAESF), Raytheon Co. (NYSE:RTN), SAFRAN S.A. (SAF) and Rockwell Collins Inc. (NYSE:COL). The table below shows the preliminary results along with the recent trend for revenues, net income and returns. CapitalCube reported extensively on Boeing Co. (BA) last month.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 9,342.0 9,444.0 9,304.0 9,470.0 9,288.0
Revenue Growth % (1.1) 1.5 (1.8) 2.0 2.2
Net Income 950.0 902.0 823.0 (342.0) 653.0
Net Income Growth % 5.3 9.6 N/A (152.4) (18.0)
Net Margin % 10.2 9.6 8.8 (3.6) 7.0
ROE % (Annualized) 30.1 30.4 29.2 (12.2) 22.0
ROA % (Annualized) 9.4 9.0 8.2 (3.5) 6.6

Valuation Drivers

Honeywell International Inc.'s current Price/Book of 3.7 is about median in its peer group. The market expects more growth from Honeywell International, Inc. than the median of its chosen peers (PE of 21.2 compared to peer median of 13.1) and to improve its current ROE of 18.8% which is around peer median.

The company's asset efficiency (asset turns of 0.9x) and net profit margins of 6.2% are both median for its peer group. Honeywell International, Inc.'s net margin has increased 1.1 percentage points from last year's low and is now close to its five-year average net margin.

Economic Moat

The company has achieved better revenues growth than its chosen peers (year-on-year change in revenues of 9.4%) but its earnings growth performance has been below the median (change in annual reported earnings of -8.1% compared to the peer median of 17.5%). This suggests that, compared to its peers, the company is focused more on top-line revenues. Honeywell International, Inc. is currently converting every 1% of change in revenue into -0.9% change in annual reported earnings.

Honeywell International, Inc.'s return on assets currently is around peer median (5.8% vs. peer median 6.7%) -- similar to its returns over the past five years (6.4% vs. peer median 6.9%). This performance suggests that the company has no specific competitive advantages relative to its peers.

The company's gross margin of 30.9% is around peer median suggesting that Honeywell International, Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Honeywell International, Inc.'s pre-tax margin of 7.7% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth and Investment Strategy

While Honeywell International, Inc.'s revenues have increased more slowly than the peer median (-0.1% vs. 1.3% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 21.2. The stock price may be factoring in some sort of a strategic play.

Honeywell International, Inc.'s annualized rate of change in capital of 5.7% over the past three years is around its peer median of 5.0%. This median investment has likewise generated a peer median return on capital of 11.9% averaged over the same three years. This median return on investment implies that company is investing appropriately.

Earnings Quality

Honeywell International, Inc.'s net income margin for the last twelve months is around the peer median (6.2% vs. peer median of 7.4%). This average margin and relatively conservative accrual policy (3.5% vs. peer median of 1.4%) suggests possible understatement of its reported net income.

Honeywell International, Inc.'s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Honeywell International, Inc. is a diversified technology and manufacturing company. It manufactures aerospace products, control technologies, power generation systems, specialty chemicals, fibers, plastics and electronic materials. The company provides a variety of services to its customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and energy efficient products and solutions for homes, business and transportation. Honeywell International operates through four reportable business segments: Aerospace, Automation and Control Solutions, Transportation Systems, Performance Materials and Technologies. The company was founded in 1885 by Albert M. Butz and is headquartered in Morristown, NJ.


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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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