Saturday, January 24, 2015

Stock Analysis: Honeywell

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.

On Friday, Honeywell announced their fourth quarter and fiscal 2014 annual earnings.  Earnings came in at $1.43 for the quarter, which beat estimates by a penny and revenues were higher than the $10.2B expected, coming in at $10.45B.  Margins grew by 9% and net profit rose 15% verses their results a year ago.  On the year, earnings came in at $5.56, beating consensus and their own high end of the range by a penny (and my estimates by 2 cents).  Revenues also beat the provided range coming in at $40.4B.  This gave EPS a 12% gain compared to 2013.  All exceptionally solid results, showing yet again how this management sets reasonable goals to the risks they see (we've been facing numerous global political and economic issues over the last 5+ years) and delivering on those expectations - often exceeding them.

There were a number of things to be somewhat excited about from the conference call.  Personally, I think the biggest take away is how CEO Dave Cote has migrated his future prospects from "Cautiously Optimistic" or "Conservative" to "Somewhat Bullish" - all words or phrases he has used.  While he acknowledges the risks that exist in some of the international areas, as he's visited his top 130 businesses, he came back with a strong sense of eagerness and optimism.  I find no reason to doubt this, as he's been very accurate with the mood of the industry since I started following him.  He believes despite some of the very early results in the US and GDP forecasts, things are accelerating and improving.  If this is accurate, his company is likely to benefit.  Other things that showed signs of promise was an acceleration in organic growth in his aerospace division - the weakest of them all, increased margin growth, the acquisition market looking more promising with potential for him to grow his company, and accelerated free cash flow.

Major risks for the 2015 year were called out in the presentation.  The drop in Oil prices are showing some minor impacts, but they have little to no impact to the company and are more likely to provide advantages as input costs are starting to reduce.  The biggest negative risk is currency conversion.  Honeywell plays gets significant business out of Europe and the EUR/USD conversion rate has turned into a negative impact.  The management team has seen this coming and took measures to protect their earnings by hedging over 80% of their earnings at a $1.20 value (current EUR value is just over $1.12).  This protects them from most downside risk in this region.  They also called out similar economic volatility in other regions and stated they're watching it closely and/or making moves to protect themselves there as well.  Russia was also singled out and it was stated they are seeing impact, but there is less than $500M in revenues from that area right now and, instead, they are looking for opportunities to grow this area if/when appropriate. 

All of the concerns keeps management's enthusiasm tempered and prepared for the risks.  As such, they have maintained their guidance from what they stated it would be back in December.  Earnings is expected to come in between $5.95 and $6.15, a 7-11% increase over 2014.  Revenues have a range of $40.5 - 41.1B with 4% organic growth anticipated.  My estimates are on the high end of the EPS range with an estimated $6.13 in earnings.  Given how reliable and consistent this company has been, I believe the company can fetch an 18 multiple on those earnings.  That puts my 2015 price target at $110.  I would expect this to increase if we find signs of accelerated growth and/or increased earnings.  Though I can't currently buy more of this stock as it's becoming too large a position, I wouldn't consider buying more shares unless it goes below $99.  Considering all of these factors, I give the stock a 2 ranking.