Honeywell: Excellent Entry Point

About: Honeywell International, Inc. (HON)
by: ChartMasterPro

The Momentum Growth Quotient for the company is 11.52, which is 20.62% higher than the average for the S&P 100.

Shares present a forward rate of return of 11.24% at the current price.

ChartMasterPro upward target price of $154.00.

Shares of Honeywell International Inc (HON) are down 8.20% since peaking on Oct. 1, 2018, and in my opinion, the shares of this consumer products, engineering, and aerospace conglomerate are an attractive buy at current price levels. The company has a solid history of generating impressive earnings growth, and the future growth ratios point to continued growth over the next twelve months. I lay out my bullish argument for the company below by reviewing some pertinent fundamental and technical aspects of the stock.

Momentum Growth Quotient

My Momentum Growth Quotient (MGQ) plays a critical part when it comes to determining if I am going to go long or short a stock. Generally, I only want to go long a stock with an MGQ higher than that of the S&P 100, and I want to go short a stock with an MGQ lower than that of the index (for a more detailed explanation of how I calculate the MGQ, please see my blog post).

As of the end of October 2018, the MGQ for the S&P 100 was 9.21.

The current MGQ for HON stands at 11.24, which implies a 20.62% higher growth rate compared to the S&P 100. This tells us that HON has strong future growth potential and is a good candidate for a long position.

Financial Snapshot

Let's dig a little deeper into the financial data to get a better feel for how the company has performed on certain fundamental metrics and what these numbers imply for future growth.

Caveat Lector: I am Quant Trader - that is, I seek to understand market behavior by using mathematical and statistical modeling, measurement, and research. So, you won't find much qualitative analysis in my work or in my trading process. The goal is to identify optimum entry points for trades based on my quantitative model and execute those trades as effectively as possible.

The Past

During the past 12 months, the average EBITDA per share growth rate of Honeywell International was 11.50% per year. During the past three years, the average EBITDA per share growth rate was 6.70% per year. During the past five years, the average EBITDA per share growth rate was 9.50% per year. During the past 10 years, the average EBITDA per share growth rate was 8.00% per year (GuruFocus). Earnings growth has been strong and consistent over the last 10 years.

The operating margin percent for HON stands at 15.57%. Each dollar of revenue the company generated brought in 15.57 cents of earnings. The company's five-year average operating margin growth rate was 8.80% per year - a decent rate of growth.

The Future

Knowing how a company has performed in the past is important in order to evaluate management's past record in running the business. But more important to us is how profitable the company will be in the future because we are investing going forward, not backward. And it's the forward-looking metrics that should really get you excited about HON.

I like to use two measuring sticks to gauge the future growth potential for companies: forward P/E and forward rate of return.

I prefer to use the forward P/E ratio (current stock's price over its "expected" earnings per share) rather than historical P/E to gauge a company's expected future earnings power. A high forward P/E ratio means that investors are anticipating higher growth in the future and are willing to pay more for future earnings - momentum investing is all about following the trend (perceived or real).

HON has a forward P/E of 18.66 compared to a 17.10 forward P/E for the S&P 100. The forward P/E for HON is higher than that of the index, suggesting that the market is expecting a higher growth rate for the company than the broader markets.

The forward rate of return for a stock (created by Donald Yacktman) is one of my favorite quotients for gauging the market's expectation for future growth for a company. Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. In simple terms, the forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.

The forward rate of return for HON stands at 11.24%. This implies that an investor buying the stock today should expect a 11.24% return over the next 12 months. The average forward rate of return for the S&P 100 as of the end of October was at 8.03%, so HON has an implied potential rate of return that is 1.39x greater than that of the index.

The risk inherent in the forward rate of return is that the calculation is reliable only if the company can grow at the same rate in the future as it did in the past. If the growth rate falters, the projected returns will not materialize. But we are willing to accept this risk as part of the difficult process of forecasting earnings and growth momentum.

Technical Snapshot

As per my ChartMasterPro Daily Trade Model, there is a high probability of a rally to the $154.00 level from here, which would equate to a gain of 6% for the shares:

  1. The MACD is rising and just turned positive (bullish momentum signal)
  2. The RSI 14 is on the verge of breaking above 50.00 (bullish momentum signal)
  3. The shares set a higher low on the most recent sell-off and will most probably rally to the $154.00 level

I will buy call options for HON to participate in the anticipated run to $154.00. To view the option details (strike price, expiry date, and leverage), you can sign up for a Free Trial for The Options Trader. Only Members receive detailed trade alerts.

For investors in the shares, I recommend that you hold for three months or $154.00, whichever comes first. For longer-term investors, I believe HON is a solid addition to any growth portfolio over the next 12 months.

Relative Strength

When looking for companies to invest in, I like to find ones with a management team that has outperformed its peers in the same industry with regard to growing earnings and generating higher than average returns for shareholders.

Management Effectiveness

HON Industry
EPS- 5-Yr Growth Rate 21.45% 8.16%
Gross Margin TTM 31.43% 25.30%
Net Profit Margin TTM 12.77% 5.42%

Return on Equity TTM

25.47% 6.48%

Source: Reuters

This is a company that's posting a much higher earnings growth rate than its peers with a management team that's very good at generating higher than average returns than its competitors. The price drop in the shares over the two months presents an excellent opportunity to initiate a position in HON.

Price Disconnect

The chart below shows the company's revenue on a TTM basis - you can see that although revenue has been steadily increasing though 2018, the share price has retreated recently and been flat for 2018. With the company's long history of being able to convert rising revenue into higher earnings and returns for shareholders, the recent pullback in price is an excellent opportunity to pick up these shares for their future growth potential.

Chart HON data by YCharts


When I go long a stock, I want to invest in a company that provides superior future growth potential, but I also want to time the entry into any position to try to maximize my return.

So, I use fundamental analysis to identify shares with a strong future growth rate, and then I apply technical analysis to identify ideal entry points.

In my opinion, HON is a compelling buy at these levels from both a fundamental and technical perspective.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HON over 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.