Honeywell - Acquisition Of Intermec Hides Disappointing Outlook For 2013

| About: Honeywell International, (HON)
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Shares of Honeywell (HON) ended Monday's trading session roughly unchanged. The diversified industrial technology and manufacturing company issued its full year 2013 forecast and announced the acquisition of Intermec.

2013 Outlook

Honeywell today announced its full year 2013 outlook. For its fiscal 2013, the company guides for full year revenues of $39-$39.5 billion, up 4 to 5% from the full year 2012 guidance of $37.5 billion. This includes the effects of acquisitions, including the deal with Intermec as announced on Monday. The revenue guidance comes in line with analysts forecasts of $39.4 billion.

Segment margins are expected to increase between 20 and 50 basis points to 15.8%-16.1%. Operating margins are expected to increase between 50 and 80 basis points to 14.2%-14.5%.

Earnings per share are expected to increase between 6 and 11% to $4.75-$4.95 per share. Analysts expected that Honeywell could earn $4.95 in 2013.

CEO and Chairman Dave Cote commented on the outlook, "We expect 2012 to be another year of strong execution for Honeywell, building on an established track record over the past decade. We're achieving good sales growth, record margins, and double digit EPS growth while continuing to generate strong free cash flow."

The Deal With Intermec

Honeywell announced that it will acquire Intermec (IN) for a total consideration of roughly $600 million. Honeywell will pay $10 per share for the provider of mobile computing, radio frequency identification solutions, bar codes and labels. The offer, represents a 25.3% premium compared to Friday's closing price.

The deal with enhance Honeywell's scale on mobile computing. Combined, Honeywell and Intermec boost the existing scanning & mobility franchise and increase the automation offerings. Upon completion, Intermec will become part of Honeywell's Automation and Control Solutions business. Intermec's 2,200 employees operate in over 65 offices across the globe.

Roger Fradin, CEO of Honeywell's Automation and Control Solutions commented on the deal, "The addition of Intermec is a natural extension to our Scanning & Mobility business, which was established through the successful acquisition of Hand Held Products, Metrologic and EMS. While Intermec strengthens our core scanning and mobile computing business, it opens up entirely new opportunities in RFID, voice solutions and barcode and receipt printing segments that we currently don't serve."

For the first nine months of 2012, Intermec generated revenues of $573.5 million. The company lost $272.4 million after paying $212.2 million in income taxes and a $41.3 million goodwill charge. Based on a simple extrapolation, Intermec could generate annual revenues of roughly $750 million, valuing the firm at 0.8 times annual revenues.

The purchase price values Intermec at roughly 10 times trailing annual EBITDA, excluding certain one-time costs. Based on expected synergies, the deal values Intermec at 5 times EBITDA, which implies that annual synergies could total $60 million per annum. The deal will dilute 2013s earnings per share by three to four cents per share. The deal is expected to be accretive to earnings per share in 2014.

The transaction is expected to close in the second quarter of 2013. The deal is subject to shareholder approval of Intermec's shareholders and regulatory review.


Honeywell ended its third quarter with $5.5 billion in cash and equivalents and short term investments. The company operates with roughly $8.0 billion in short and long term debt, for a net debt position of roughly $2.5 billion. As such, Honeywell has plenty of liquidity to finance the deal.

For the first nine months of the year, Honeywell generated revenues of $28.1 billion. The company net earned $2.7 billion for the period, or $3.43 per diluted share. The company is on track to generate annual revenues of $37.5 billion, on which the company could earn $4.47 per share.

The market currently values Honeywell at $48.5 billion. This values the firm at 1.3 times annual revenues and roughly 14 times annual earnings. Honeywell currently pays a quarterly dividend of $0.41 per share, for an annual dividend yield of 2.6%.

Some Historical Perspective

Year to date, shares of Honeywell have risen some 14%. Shares started the year around $54 per share and rose to $62 during spring before falling back in the summer. Shares recovered to highs of $64 in recent weeks, currently exchanging hands at $62 per share.

After trading as low as $25 in 2009, shares are trading near all time highs of $68 set in 1999. Honeywell is on track to report annual revenues of $37.5 billion. Net income rose over the past years on track to earn $3.5 billion this year.

Investment Thesis

Honeywell's deal with Intermec is a small addition to the firm. The deal will add roughly 2% in annual revenues, thereby providing a strong base under the 2013 revenue forecast.

The deal values Intermec at 10 times annual EBITDA and roughly 0.8 times annual revenues. The valuation seems fairly cheap, compared to Honeywell's own valuation multiples of 1.3 times annual revenues and 8.5 times annual EBITDA. Factoring in synergies, Honeywell values Intermec at just 5 times EBITDA.

Investors seem pleased with the deal of Intermec, which seems very attractive and gives Honeywell ownership to well-known products including First Alert, the home security system. In October of this year, Honeywell bought a 70% stake in Thomas Russell & Co for $525 million.

Shares are trading unchanged as investors are not impressed with the full year outlook for 2013. Revenues and earnings came in at the low end of the guided range, however this includes the accretive impact of the acquisition of Intermec. Excluding the impact of the deal, the guidance fell short of expectations with existing operations expected to report merely 1 to 3% increase in revenues.

Shares are fairly valued at these levels, being a perfect addition to any long term investment portfolio. Valued at 1.3 times annual revenues and 14 times annual earnings, shares are fairly valued paying a fair dividend yield of 2.4% in the meantime.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.