Honeywell - Stock Analysis

Wow, 118 views so far on my last post regarding my analysis of Citi and not a single comment or +1.  I guess I had the right tags, but no real interest in some rookie's thoughts.  That's ok.  I'm just happy to have had all those hits!  Anyhow, now is the time for my second installment of Stock Analysis before we get into earnings.  Today I'm picking Honeywell.  When it comes to stocks that makes me glad to be playing this stock picking game and gaining experience, Honeywell is doing a lot for making me feel like I can do something right.  As I enter my 3rd year of picking stocks, I've held HON all three years and have a safe and healthy profit to boot.  I have made one mistake for sure on this stock and it was selling a portion of it when it was up 15% - if you want to call that a mistake.  Today, it's my largest holding even without the shares I've sold because it's appreciated so well.

Like I did last time, I'm going to start with my thesis.  I'm pretty sure I've discussed this before, so I'll try to keep it quick.  I believe that there is a major long-term theme in energy efficiency.  With gas prices as high (and used to be higher) than they were, with people pinching pennies all the more due to the economy, I wanted to find a play that can make a profit helping everyone do what they want on less juice.  Granted, Honeywell has only a portion of their company that fits this thesis, but it's a very solid and well known portion that is growing within the company.  When you combine this with the fact that airplanes appear to be going into a replacement cycle and there being a constant focus on safety and safety products, two-thirds to three-fourths of the company's profits are based from these 3 categories.  Combine this with a very strong management team, a long-term plan in execution, a respectable dividend to help protect downside and you're looking at a grade A company - best in show (it doesn't hurt that when I selected the company it was still down significantly from the great depression).

Last year, HON outperformed the S&P500.  It went up over 19% - not including dividend payments.  Speaking of those, they also increased the payout on that by 10% in the 4th quarter of 2012 as well while maintaining strong free cash flow.  The stock currently trades at 14.6 times expected 2012 earnings.  I'm expecting when we get the fourth quarter report they'll be at or just under 4.50 per share earnings.  Typically a stock like this will trade around 16 times earning and a company of Honeywell's caliber might trade higher. For 2012, Honeywell grew earnings by 10% despite less than expected sales.  Margin growth was stellar and the main factor for such strong out performance.  I say out performance because despite hitting towards the top end of their guidance, I think it's important to note that the guidance was revised upwards during the earlier part of the year and yet they still got close to the top end.  2013 does appear to continue growth of earnings and sales, but the numbers aren't projected quite as large as this last year.  The one thing I can say about HON is that the do a fantastic job with their presentations and forecasting.  It's always very clear, right in front of you, and since I've followed the company, they've been very accurate, if not under promising and over delivering.  Speaking of which, it seems very strongly like they've decided to try to under promise for 2013 and set the bar a little low.  Some of the macro expectations have predictions of getting worse from our current state.  Although entirely possible, I really don't expect this to be the case over the long-term of this year.  In fact, I expect slow, but methodical growth out of the US, and possibly more accelerated growth out of other regions which have gotten their finances more under control, or have gotten inflation under control.  All in all, this stock easier to follow and learn what to look for when you analyze more complex holdings.

Alright, Honeywell is a good stock and I've done well with it.  What are the risks and what "bad stuff" can I say so it doesn't seem like I'm just having a love fest with a piece of paper that has treated me well, but provides no guarantees of continued performance (Let's face it, the stock is only good to me if I know when/if to get out anyway).  Well the very first thing is that the company IS so great and also is so open/accurate.  Sounds like a high quality problem, doesn't it?  In a way it is.  Because it has such a strong track record, it's expected to continue to do well.  If it starts to mess up, the stock price will likely get hurt hard and fast.  Good equation to reduce unrealized gains in a hurry.  Because this management team is so typically strong in their annual predictions, I do have a little concern over their projected growth in 2013.  Sales are expected only to rise 1% - 3% while they continue to take advantage of margin growth to get them to 6%-11% earnings growth.  This sounds consistent from a earnings perspective, but there's a limit to what you can squeeze out of margins as well.  If their macro predictions come true and you get a whiff of margins contracting, it's time to take some profits and wait for a strong pullback.  Under this particular circumstance, it's not impossible to see HON's price to fall to the $55-57 range by any means.  Another thing to watch for is overall GDP growth.  This company will depend very much on this - 46% of earnings is from US and 21%  is from high growth countries like China, India, Mexico, and Brazil.  How these countries go will dictate the path for Honeywell too - and all we need is a fear of slowdowns in those areas to hurt us.  The final concern is the analyst opinions.  Here we have 20 analysts at buy or strong buy, only 5 at hold and no sells.  That's a lot of favor for the stock.  Since it's not a high growth company, this isn't as strong a factor, however, if a report comes out with downbeat earnings, or worse yet, guidance, be prepared to evacuate a portion of your position before the analysts start downgrading and lowering price targets.

Now for my personal meat and potatoes.  I don't have a buy point right now because it's my strongest holding.  On 16 times earnings and a 4.75 2013 earnings prediction, this stock could raise to $76, although I have a feeling in the near term we'll have a consolidation period around $66 where it trades sideways for a little while.  If something goes significantly wrong (don't just panic and sell because of headlines or there's a strong down day on a over reaction) and you have proof that the plans that have been so clearly laid out become unattainable or unlikely, look to lock in a good chunk of gains quick and don't even consider buying anything back before the price has fallen $4 minimum - probably would be safer to wait until around $60.  Remember, if something in the macro picture truly does go negative, I can see us getting down to $55-57 as part of a garden variety recession.  Fortunately, I don't think the odds of that are very strong at this point.

Thanks for reading and hope you found something of interest.  Comments are always welcome as I have much to learn.