Honeywell: Addition Of Thomas Russell Strengthens UOP Business

| About: Honeywell International, (HON)
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Honeywell (HON) announced last week on Monday that it will acquire a 70% stake in Thomas Russell Co. for $525 million in cash. Shares of Honeywell rose 1.8% in Monday's trading session.

The Deal

Honeywell announced that its UOP business will acquire a 70% stake in Thomas Russell, the privately-held provider of technology and equipment for natural gas processing and treating.

Honeywell will pay $525 million for a 70% stake in the company, valuing the entire company at $750 million. Honeywell has the right to acquire the remaining 30% stake in the near future.

With the acquisition of Thomas Russell, UOP will offer a range of technologies and products. This allows shale and conventional natural gas producers to remove contaminants from natural gas and recover high-value natural gas liquids used for petrochemicals and fuel.

CEO of Honeywell Performance Materials and Technologies Andreas Kramvis commented on the deal, "Thomas Russell is a terrific complement to our current business and is particularly well positioned to serve the growing market for processing shale gas, as well as gas from oil fields. With this acquisition, UOP will provide a comprehensive range of key technologies to natural gas producers globally, as well as broad range of technologies to convert natural gas feedstocks into high-value petrochemicals."

Thomas Russell expects to generate annual revenues of $425 million in 2012. Further financial details were not released. The deal values Thomas Russell at 1.8 times 2012s annual revenues.

Honeywell estimates that the acquisition is accretive to 2013's earnings. The deal is subject to customary regulatory approvals and is expected to close in the fourth quarter.


Honeywell ended its second quarter of 2012 with $4.8 billion in cash, equivalents and short term investments. The company operates with $8.0 billion in short and long term debt, for a modest net debt position of $3.2 billion. Given the size of Honeywell and its financial strength, the acquisition can easily be financed.

For the first six months of 2012, Honeywell generated revenues of $18.7 billion. The company net earned $1.7 billion, or $2.21 per diluted share. For the full year of 2012, Honeywell guides for annual revenues of $37.8-$38.4 billion. Earnings per share are expected to come in between $4.40-$4.55.

The market values Honeywell at $48 billion. This values the firm at 1.3 times annual revenues and 14 times 2012s expected annual earnings.

Currently, Honeywell pays a quarterly dividend of $0.37 per share, for an annual dividend yield of 2.4%.

Investment Thesis

Year to date, shares of Honeywell have risen some 13%. Shares have traded the entire year between $53-$63 per share, now exchanging hands at the upper end of the range at $61.

Over the past five years, shares are trading largely unchanged. Shares fell to lows of $25 in the beginning of 2009 but have recovered to $60 at the moment, around its all time highs. Between 2008 and 2012, the company only modestly increased its annual revenues from $36.6 billion in 2008 to an expected $38.1 billion this year. Net income rose from $806 million to an expected $3.5 billion.

Honeywell's deal with Thomas Russell is rather modest, given the size of the industrial conglomerate. The entire deal will add little over 1% in total revenues. It is a useful addition to its UOP Gas Processing and Hydrogen business.

Furthermore the deal seems fair on a revenue multiple and increases Honeywell's exposure to the growing natural gas industry. The deal values Thomas Russell at a revenue multiple of 1.8, versus a valuation of 1.3 times for Honeywell itself. Honeywell's UOP business has already increased its offerings in natural gas by acquiring the gas membranes line from W.R. Grace in 2009.

Shares of Honeywell trade at a fair valuation, despite the fact that shares are trading near all time highs. While I see few short-term triggers for shares, the stock is a perfect addition to any-long term portfolio. Investors should expect moderate capital gains in future years as the company has decent operations in a range of industries. The company trades at 14 times annual earnings, and continues to pay a reasonable dividend yield of 2.4%.

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.