Stock Analysis: Honeywell (HON)

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

On Friday, Honeywell discussed their second quarter earnings results.  As we've come to expect from this management team, execution was strong with results beating on both the top and bottom lines and an increase of guidance estimates by raising the lower end of their guidance by five cents.  The range is now $5.45 - $5.55 for 2014 earnings.  In addition, profit margins continue to expand as per the company's plans.  All of this has been done while increasing cash flow conversion.  They've also recently announced their next 5-year plan as they expect to continue to grow earnings at a double-digit pace up through 2018.  

As to be expected with a diversified conglomerate such as Honeywell, some areas were strong, while others struggled some.  Aerospace was the laggard of the group with flat sales and a small margin increase.  With a good part of this business being related to military aerospace, weakness is to be expected, however the commercial space is also struggling.  To try to improve overall performance, it has been decided that the Aerospace and Transportation Services divisions are going to merge into 1 unit.  The expectations from this is that by putting the units together, it will force them to work more closely and the Aerospace group will gain improved efficiency by learning from success ares that Transportation Services has experience over the last number of years.  This should prove to be a successful move over the course of the next few years.  The Automation and Controls and Performance Materials and Technology units continue to post solid gains with backlogs providing a strong outlook for the future.

In all, Honeywell has posted another strong quarter.  It's become something that is expected of the company and the consistency being delivered makes this a great long-term portfolio holding.  Additionally, this consistency is starting to provide the company a premium multiple for its stock.  Despite this, the current price is still around 17 times this year's earnings estimates.  Analysts are currently estimating that earnings will be $5.54 for 2014, which is one cent below the top of the company's guidance.  History says this shouldn't be a big deal, but I always tend to be a little cautious when the analysts are pressuring high ends of guidance given by a management team.  The stock starts becoming priced for perfection and if anything goes wrong, it's likely to get hit hard.  I don't consider this a red flag yet, mainly because it's not trading for a premium multiple.  I do think it's something worth keeping an eye on, though.

My estimates for the remainder of the year is still a little conservative with earnings at $5.50 for 2014.  Since I feel I have visibility, I'll also put 2015 earnings estimates at $6.10.  I feel the stock deserves a premium 18-19 times earnings multiple for it's proven growth and consistency.  As such, my 2014 price target remains at about $100 - not far from the current price.  However, my 18 month price target is now set at $110.  Any stock whose price can grow at a 5-10% pace per year is certainly worth holding on to.  It's also worth buying on a 5-10% pullback.  As such, I continue to rate the stock a 2.  However, I also consider it wise to trim some if you near the 2014 price target early in these final 6 months and take advantage of any pullbacks that take this stock under $90 - which is certainly possible given geopolitical turmoil we've seen in the last week.