Sunday, January 26, 2014

Stock Analysis: Honeywell (HON)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash

Honeywell is an international diversified Industrial company.  For most consumers, the name probably mostly reminds you of all the heating and cooling parts for your home - like thermostats - however, they create a much wider range of products such as safety materials (Haz-mat suits), turbo for engines, and a lot of components to airplane cockpits among a very wide variety of other products.  The company is led by CEO Dave Cote for a number of years now.  Cote, in this time, has managed to prove how reliable a CEO he can be as he's helped turn the company around and has led it to be a consistent under promise and over deliver practitioner through the last 4 years of difficult economic times I've been following the company.

Past Year:
Honeywell performed spectacularly last year, ending the year with a 43.96% rise in stock price compared to the S&P's 29.69% rise and the Industrial sector's 40.41% rise (based on the XLI ETF fund).  These levels of performance are not something to expect year after year as it was more indicative of the overall market performance for 2013.  That being said, Honewell has consistently outperformed the S&P500 for the 3+ years I've owned shares in the company.  Because this company is diversified, not everything is operating with guns blazing.  This continues to be the par for the course as 2013 had a couple areas, like defense and textures that held things back, albeit well within expected ranges.  In the end, it's hard to even call that a shadow on the 11% earnings increase and Sales increasing 8%.  This was truly a year of both top and bottom line growth in an environment where there continued to be complaints about not seeing much for top line growth.  All in all, 2013 was a great year for the company.

2014 Prognostication: 
2014 doesn't look like it's going to be a year to get cautious for Honeywell.  They continue to invest in their future growth, continue to improve margins, and anticipates solid growth - which says a lot, considering their habits to under promise with their estimates.  They're estimating 10% earnings growth on around 3% sales growth.  I really think 5% sales growth is more realistic, pushing earnings up to about 12-15%.  That being said, I don't anticipate this stock or any will fly as high this year as they performed last year.  Right now, we're starting to see signs of a small market correction due to concerns in China.  Honeywell does a lot of business in China and has been an out performer in that area compared to their peers.  This leads them prone to risk from these developments and should be watched carefully.  That being said, I ill have high amounts of trust in this company and their leadership to successfully navigate through this with limited impact to their ability to deliver on the goals they've set.  The stock may pull back as much as 10-15% from it's near $92 high, but if it does, it's an opportunity to buy, not to get shook out.

My Stock Ownership Plans:
To my own good fortune, in the time I've owned my shares of Honeywell, the stock has produced a double for me.  It currently holds a 18.05% position of my portfolio and therefore I cannot buy more (personal rules).  Currently, I'm expecting the stock to pull back as much as 5% more on the current market action - at which point I think others should be aggressively buying shares if they have room.  I will sell to lock in some of my gains if I need to raise cash for other transactions or to re-balance my portfolio (Won't let it be more than 20% of total).  I rate the stock a 2 in principal, but a 3 based upon my portfolio's specific situation I just described.  Based on the estimates provided in Friday's call, I'm guiding earnings of $5.45.  Considering their consistency and ability to execute, I see no reason why people won't pay 18x for their 10% growth rate.  As such, I'm conservatively placing my price target at $100  If this stock goes below $85, I'd honestly be a little surprised, but as an industrial, they tend to have the wildest movement based on market swings.  Since the earnings report provided on Friday was strong, I expect this stock will be one of the early ones to rebound and show signs that the market is about to stabilize form this short-term pullback.