Honeywell International Inc.

Transcription

1 January 29, 2015 Honeywell International Inc. Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 07/18/2012 Current Price (01/28/15) $99.82 Target Price $ SUMMARY DATA (HON-NYSE) SUMMARY Honeywell reported year-over-year increase in adjusted earnings in fourth quarter 2014, beating the Zacks Consensus Estimate by $0.01. With a diversified business portfolio that mitigates operating risks, Honeywell has the potential to earn consistent above-average returns in the long term. The company has a flexible yet disciplined focus on cost and productivity, and maintains a conservative balance sheet. Honeywell also continues to benefit from investments in new products and services. However, adverse foreign currency translations and volatility in commodity prices are likely to peg back its growth momentum to some extent. We maintain our Neutral recommendation for the stock. 52-Week High $ Week Low $85.11 One-Year Return (%) Beta 1.30 Average Daily Volume (sh) 2,957,574 Shares Outstanding (mil) 783 Market Capitalization ($mil) $78,140 Short Interest Ratio (days) 2.33 Institutional Ownership (%) 82 Insider Ownership (%) 1 Annual Cash Dividend $2.07 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 5.2 Earnings Per Share (%) 19.6 Dividend (%) 11.3 using TTM EPS 18.1 using 2015 Estimate 16.4 using 2016 Estimate 14.7 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Diversified Ops Zacks Industry Rank * 212 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,328 A 9,693 A 9,647 A 10,387 A 39,055 A ,679 A 10,253 A 10,108 A 10,266 A 40,306 A ,561 E 10,309 E 10,351 E 10,716 E 40,937 E ,973 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.21 A $1.28 A $1.24 A $1.24 A $4.97 A 2014 $1.28 A $1.38 A $1.43 A $1.43 A $5.52 A 2015 $1.39 E $1.50 E $1.57 E $1.62 E $6.08 E 2016 $6.78 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Honeywell International Inc. is a global diversified technology and manufacturing company, with a wide range of aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals and energy efficient products and solutions for homes, business and transportation.. Based in Morris Township, New Jersey, the company is a global leader in refrigerants, aerosols, and foam-insulation blowing agents that are used to replace ozone-depleting Chlorofluorocarbon and Hydro Chlorofluorocarbons. These products also improve the energy efficiency of homes, appliances, and commercial refrigeration systems. Honeywell is engaged in manufacturing, sales and service, research and development activities, mainly in the United States, Europe, Canada, Asia and Latin America. Honeywell organizes its business into three operating segments: Automation and Control Solutions (37.5% revenues came from this segment in fourth-quarter 2014) provides environmental and combustion controls, sensing controls, security and life safety products and services, process automation and building solutions and services for homes, buildings and industrial facilities. Aerospace (37.5%) is a leading global provider of integrated avionics, engines, systems and service solutions for aircraft manufacturers, airlines, business and general aviation, military, space and airport operations. Performance Materials and Technologies segment (25.0%) offers leading technologies and high-performance materials, including hydrocarbon processing technologies, catalysts, adsorbents, equipment and services, fluorine products, specialty films and additives, advanced fibers and composites, intermediates, specialty chemicals, electronic materials and chemicals. Honeywell has decided to reorganize its operating segments by merging Transportation Systems segment with the Aerospace segment to leverage on the shared business models and the engineering and technology similarities. Effective third-quarter 2014, the three business segments of the company are: Aerospace, Automation and Control Solutions, and Performance Materials and Technologies. The overall financial performance of the company will include Transportation Systems within Aerospace segment and will have no material impact on the historical consolidated financial position, results of operations, or cash flows. Equity Research HON Page 2

3 REASONS TO BUY Honeywell s diversified business portfolio has the potential to earn consistent above-average returns and mitigate operating risks. The company s diligent focus on working capital management, free cash flow generation and a conservative balance sheet remain key positive attributes amid a challenging macroeconomic environment. In a concerted effort to align its portfolio around Great Positions in Good Industries and leverage on technological synergies, Honeywell is restructuring its operating segments. This includes the merger of Transportation Systems segment with Aerospace business segment. In shortcycle businesses the company expects continuous growth from new products and technologies, which include products derived from its solstice and molecules and new platform launches in Transportation Systems. Going forward, growth will also be supported by favorable end market trends and modest improvement in non-residential spending, benefiting both commercial and industrial businesses. While the long-cycle side of business is expected to have good visibility into growth based on strong orders.. All these initiatives bode well for the growth prospects of the company. The company s balanced mix of long- and short-cycle businesses, along with a decent organic growth in new products and expansion in high-growth regions augur well on a long-term perspective. With a flexible yet disciplined focus on cost and productivity, Honeywell remains positive on the macro environment and expects organic sales growth acceleration throughout the year. The outlook for the U.S. economy continue to improve and the company is expecting a positive trend in its U.S. businesses and at the same time remains focused on increasing its presence in high growth regions. The population growth urbanization and infrastructure development continues to create attractive opportunities across its entire portfolio. Investments and sales and marketing resources are targeted to the higher growth cities in China where local economies are growing at a faster pace. In China, Honeywell expects high single digit growth in Additionally the company is building a robust pipeline of new products in air purification, energy efficiency, and security. All these factors bode well for accelerated growth for Honeywell in China in Also Honeywell expects to realize synergies from integration of Datamax-O'Neil acquisition going forward. We remain encouraged by management s continued efforts to launch products and technologies in order to drive organic growth and expand its business in new geographical regions. Additionally, management s effort to drive margin expansion is also praiseworthy. The restructuring and cost streamlining initiatives should translate into continued margin expansion in the second half of the year. REASONS TO SELL Although the company s proactive restructuring initiatives have positioned it to navigate better than many of its peers, it is yet to witness signs of stabilization in a number of its major end markets. A change in the U.S. government s defense and aerospace funding could also adversely impact sales of Aerospace s defense and space-related products and services. The high research and development costs could also be drag on the Aerospace segment margin and affect its profitability. The cost of raw materials is a key element in the cost of products, particularly in Performance Materials and Technologies (cumene, fluorspar, perchloroethylene, natural gas and ethylene), Transportation Systems (nickel, steel and other metals) and Aerospace (nickel, titanium and other metals) segments. Honeywell is susceptible to material price inflation, which in turn affects profitability. In addition, major components, product equipment items and raw materials are procured or subcontracted on a single-source basis with a number of domestic and foreign companies. As such, Honeywell is highly dependant on its supply chain to scale production and adjust delivery of long-lead time products during times of volatile demand. High operating risks in one of the key ingredients of its business might be a drag on its long-term sustainability. Given its international presence, the company often faces unfavorable foreign currency movements, impacting its top-line growth. Any future slowdown in the global economy or the manufacturing industry as Equity Research HON Page 3

4 a whole will have an adverse impact on its business, and would hamper its long-term growth potential. A geopolitical impasse due to various conflicts and disruptions may further affect its international operations in key markets. RECENT NEWS Honeywell Q4 Earnings Beat By a Sliver December 31, 2014 Honeywell reported fourth-quarter 2014 net income of $956 million or $1.20 per share, compared with $947 million or $1.19 per share in the year-ago quarter. The increase in earnings was driven by strong execution in businesses and continued momentum across the portfolio. For full-year 2014, the company recorded net income of $4,239 million or $5.33 per share versus $3924 million or $4.92 per share in the year-ago period Earnings per share (excluding the pension mark-to-market adjustment) stood at $1.43 in the reported quarter compared with $1.24 per share in the year-ago quarter. Adjusted earnings beat the Zacks Consensus Estimate by $0.01. Adjusted earnings for full-year 2014 stood at $5.56 per share compared with $4.97 in the year-ago period. Adjusted earnings for full-year 2014 also beat the Zacks Consensus Estimate of $5.45 per share. Revenues Revenues in the fourth quarter decreased 1.0% year over year to $10,266 million. Reported revenues beat the Zacks Consensus Estimate of $10,222 million. The decrease in revenues was due to lower product and service sales. During the reported quarter, Honeywell delivered 4% organic sales growth. The increase in organic sales growth was driven by investments in new products and technologies. For full-year 2014, revenues were $40,306 million compared with $39,055 million in the year-ago period. Full-year 2014 revenues also surpassed the Zacks Consensus Estimate of $40,226 million. Operating margins were down 20 bps year over year to 15.9% in the reported quarter. Operating margins were up 30 bps year over year to 16.6% in full-year Segment Performance Aerospace segment sales were down 6% year over year at $3,842 million in the reported quarter. Revenues for the segment were down owing to the unfavorable impact of incentives, the Friction Materials divestiture and the negative impact of foreign exchange. Segment profit decreased 14.0% year over year to $663 million, while margins contracted 160 bps year over year to 17.3%. Automation and Control Solutions segment sales were up 3.0 % year over year to $3,847 million in the reported quarter. The increase was driven primarily by strong organic growth across the portfolio, offset partially by the unfavorable impact of foreign exchange. Moreover, segment profit rose 8.0% to $613 million, while margins for the segment were up 70 bps year over year to 15.9%. Growth in profits was attributable to higher volumes, M&A integration, and improved productivity, partially offset by continued investments for growth. Equity Research HON Page 4

5 Performance Materials and Technologies segment sales were flat year over year at $2,577 million in the reported quarter. However sales were up on a organic basis owing to higher UOP licensing sales, growth in Process Solutions and higher sales in Advanced Materials, offset by the unfavorable impact of foreign exchange and lower UOP catalyst sales. Segment profit increased 6.0% to $425 million, driven by higher volume and productivity, partially offset by continued investments for growth. Margins in the segment rose 90 bps year over year to 16.5%. Balance Sheet and Cash Flow Cash and cash equivalents as of Dec 31, 2014 were $6.9 billion versus $6.4 billion in the year-ago period. Long-term debt as of Dec 31, 2014 stood at $6.0 billion. Net cash provided by operating activities for twelve months ended Dec 31, 2014 stood at $5,024 million, compared with $4,335 million in the prioryear period. Free cash flow stood at $3,930 million as of Dec 31, 2014, compared with $3,388 million in the prior-year period. Outlook Honeywell reaffirmed its full-year 2015 guidance. The company expects sales in the range of $40.5 $41.1 billion. Earning per share is expected in the range of $5.95 to $6.15. Operating margin is expected to be in the range of 16.7% 17.0%. Free cash flow is expected to be in the range of $4.2 billion to $4.3 billion. Going forward, Honeywell expects a challenging macro environment though it expects to deliver strong earnings growth in the forthcoming year. Honeywell intends to continue investing in new products and technologies, and increase its footprint in high-growth markets The company believes that its balanced portfolio mix of short- and long-cycle businesses are well-positioned to deliver higher organic sales and continued margin expansion in Equity Research HON Page 5

6 VALUATION Honeywell s current trailing 12-month earnings multiple is 18.1x compared with the 26.6x average for the peer group and 18.6x for the S&P 500. Over the last five years, the company s shares have traded in the range of 12.7x to 26.2x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it would perform in line with the broader market. Our target price of $ or 17.3X 2015 EPS reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Honeywell International Inc. (HON) Industry Average S&P United Technologies Corp (UTX) Marubeni Corporation (MARUY) Sumitomo Corporation (SSUMY) M Company (MMM) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Honeywell International Inc. (HON) Industry Average S&P Equity Research HON Page 6

7 Earnings Surprise and Estimate Revision History Equity Research HON Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of HON. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform %, Neutral %, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst: Meenu Goyal Lead Analyst: Supriyo Bose Content Editor: Supriyo Bose QCA: Supriyo Bose Reasons for Update: 4Q14 & FY14 Earnings Update Equity Research HON Page 8