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. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
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. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Today Honeywell announced 3rd quarter 2014 results and they were excellent to say the least. Earnings came in at $1.47 per share on $10.1B in sales while the street was expecting $1.42 per share and $10B in sales. Additionally, they raised the lower end of the 2014 guidance by five cents - the third raise of the year - giving a 2014 earnings estimate range of $5.50 - $5.55.
Besides Earnings and sales, margins were up at the top end of guidance or higher for the quarter as well. On the qurther, margins expanded 70 basis points, which was higher than expected. Last quarter I explained how aerospce showed some struggles, but even the did well this quarter and have expectaions of solid quarters ahead as some new products get released going into 2015. Last, but not least, organic growth grew on a quarterly basis as well, from 3% last quarter to 5% this quarter.
It's easy to look back into the third quarter and say "Yep, we did well." However, the stock market has had its crash-like pullback in the fourth quarter. What does Honeywell anticipate going forward with everything getting hammered as it has been? Well, as I said, they raised guidance. This means despite the strong dollar, despite ebola, and despite the dramatic drop in oil prices, Honeywell expects to deliver. Everyong go ahead and start singing allelujia and rejoicing. To top things off, they started to lay the initial framework for 2015. Despite all the doom and gloom in the market, despite how many times they said they have been and continue to be conservative in their planning, they expect all segments to either perform the same as 2014 (which if you look at the history, is a rather acceptable performance overall) or better. In fact, much of it was expected to perform better! We'll know more about those plans for 2015 on December 16 when they share their 2015 expectatoions. What we do know right now is that they have done something new by placing some hedges to protect the down side on currency translation with Europe. CEO Dave Cote said he didn't think a $1.10 mark for the EU/USD was out of the question right now (currently it's around $1.27). They also stated that the vast majority of their products in the Oil and Gas areas are not typically impacted by the price of crude (mid and downstream), as the products are used in refining, which only picks up when gas prices get cheaper.
So how do I feel about the stock? Well, I wish it wasn't so close to the 20% mark so I could go buy more, in all honesty. Just a couple days ago this stock was sitting aroud $86. I've been saying buy more if the stock was under $90 and even despite how the market was acting, I would've been buying more at that range, had I capacity for it - even despite where my cost basis is. On these results, the stock popped over 4% and has crossed my $90 line. I wouldn't be surprised a bad day in the market pulls it back down and if it does, I suggest you buy some. This is a great management team that knows how to execute in both good and bad times, even if the stock doesn't show it all the time. It was clear on the call that the analysts wanted to see Honeywell buy back stock, given the prices. That just helps boost my confidence on how much value really sits here right now.
Finally, I want to get into where I think this stock is going. The truth is, despite how great I feel about the company and the management team, it's clearly obvious the stock can and perhaps will become disconnected to the company's performance until this correction completes itself. As such, I'm going to play conservative by not changing any of my targets or expectations at this time. That leaves my 2014 EPS target at the low end of guidance - $5.50, thouhgh I do belive they can beat it. I'm also leaving my 2014 target price at $100. Given the market struggles, I doubt we hit it, but it's possible to get back up to around $96 if the market improves. 2015 price target will stay at $110 until I see more in December. I will continue to rank the stock a 2, namely because I can't buy more. Were it not for this, it would be ranked a 1 and anything under $90 is a sale to take advantage of.
Besides Earnings and sales, margins were up at the top end of guidance or higher for the quarter as well. On the qurther, margins expanded 70 basis points, which was higher than expected. Last quarter I explained how aerospce showed some struggles, but even the did well this quarter and have expectaions of solid quarters ahead as some new products get released going into 2015. Last, but not least, organic growth grew on a quarterly basis as well, from 3% last quarter to 5% this quarter.
It's easy to look back into the third quarter and say "Yep, we did well." However, the stock market has had its crash-like pullback in the fourth quarter. What does Honeywell anticipate going forward with everything getting hammered as it has been? Well, as I said, they raised guidance. This means despite the strong dollar, despite ebola, and despite the dramatic drop in oil prices, Honeywell expects to deliver. Everyong go ahead and start singing allelujia and rejoicing. To top things off, they started to lay the initial framework for 2015. Despite all the doom and gloom in the market, despite how many times they said they have been and continue to be conservative in their planning, they expect all segments to either perform the same as 2014 (which if you look at the history, is a rather acceptable performance overall) or better. In fact, much of it was expected to perform better! We'll know more about those plans for 2015 on December 16 when they share their 2015 expectatoions. What we do know right now is that they have done something new by placing some hedges to protect the down side on currency translation with Europe. CEO Dave Cote said he didn't think a $1.10 mark for the EU/USD was out of the question right now (currently it's around $1.27). They also stated that the vast majority of their products in the Oil and Gas areas are not typically impacted by the price of crude (mid and downstream), as the products are used in refining, which only picks up when gas prices get cheaper.
So how do I feel about the stock? Well, I wish it wasn't so close to the 20% mark so I could go buy more, in all honesty. Just a couple days ago this stock was sitting aroud $86. I've been saying buy more if the stock was under $90 and even despite how the market was acting, I would've been buying more at that range, had I capacity for it - even despite where my cost basis is. On these results, the stock popped over 4% and has crossed my $90 line. I wouldn't be surprised a bad day in the market pulls it back down and if it does, I suggest you buy some. This is a great management team that knows how to execute in both good and bad times, even if the stock doesn't show it all the time. It was clear on the call that the analysts wanted to see Honeywell buy back stock, given the prices. That just helps boost my confidence on how much value really sits here right now.
Finally, I want to get into where I think this stock is going. The truth is, despite how great I feel about the company and the management team, it's clearly obvious the stock can and perhaps will become disconnected to the company's performance until this correction completes itself. As such, I'm going to play conservative by not changing any of my targets or expectations at this time. That leaves my 2014 EPS target at the low end of guidance - $5.50, thouhgh I do belive they can beat it. I'm also leaving my 2014 target price at $100. Given the market struggles, I doubt we hit it, but it's possible to get back up to around $96 if the market improves. 2015 price target will stay at $110 until I see more in December. I will continue to rank the stock a 2, namely because I can't buy more. Were it not for this, it would be ranked a 1 and anything under $90 is a sale to take advantage of.
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