Valuation: Honeywell International Inc. (HON)

 Company Profile:  Honeywell International Inc. (HON) (obtained via Google Finance)

Honeywell International Inc. (Honeywell) is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, and process technology for refining and petrochemicals. The Company operates in four segments: Aerospace, Automation and Control Solutions, Specialty Materials and Transportation Systems. It is engaged in manufacturing, sales, service and research and development mainly in the United States, Europe, Canada, Asia and Latin America. In May 2006, the Company purchased Gardiner Groupe. In February 2006, Honeywell sold Indalex. In May 2006, it sold First Technology Safety & Analysis (FTSA) business. In December 2006, the Company also sold First Technology Automotive business. In July 2007, the Company acquired Dimensions International and Enraf Holding B.V.

Business and Management Review

1) Is the business simple and understandable?

Honeywell’s business is simple but its products are not.  Most would not be able to understand the inner workings of an airplane or spacecraft.  This fact may turn away the investor who is most adamant about following this Buffett tenet, but overall the actual business side of things is more on the understandable side of things.  The company designs and manufactures high-tech products for sale to large corporations or governments as well as home appliances.

2) Does the business have a consistent operating history?

Honeywell traces its roots to the 1880s, when one of the founders invented the thermostat.  Since then, a few mergers have occurred to create the company we know today, but the operating strategy has remained constant.  You can read an in depth history of the company on their website. 

3) Does the business have favorable long term prospects?

The company’s prospects are excellent as long as it continues to be a front-runner in the creation of new products and competes for large scale projects.  In particular, we are enthusiastic about the company’s efforts in the aerospace field as space seems to be an area of interest and potential growth.

4) Is management rational?

The company’s management has remained rational throughout its history by remaining focused on its original strategy and not pursuing unneeded acquisitions.

5) Is management candid with its shareholders?

The company’s investor relations page is slightly more in depth than most, and we enjoyed perusing the “about us” section.

6) Does management resist the institutional imperative?

We find no reason to believe the management is following the institutional imperative.

Financial and Value Review

Defensive:

1) Size of firm

The market cap of Honeywell is $44.22 billion.  Pass.

2) Strong financial condition

The company’s current ratio is about 1.13, far below the 2.0 requirement.  Fail.

3) Earnings stability

The company has not had a consistent positive net income for over 10 years.  Fail.

4) Dividend record

Honeywell has consistently paid a dividend for over 10 years.  Pass.

5) Earnings growth

Earnings have not grown more than 1/3 over the last 10 years.  Fail.

6) Price to earnings analysis

With a ModernGraham PE ratio (using our Methods) of 32.65, the requirement of under 20 is not met.   Fail.

7) Price to assets analysis

The ModernGraham Price to Book ratio for Honeywell is 4.77, higher than our 2.5 limit.  The multiple of PE to PB is higher than our requirement of 50.  Fail.

Overall

Having passed only 2 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Honeywell is suitable for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is below 1.5 and debt to net current assets is not below than 1.1.  Fail.

2) Earnings stability

The company has not achieved a consistently positive net income for over 5 years.  Fail.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is not less than 150% of the net tangible assets.  Fail.

Overall

We do not find the company to be suitable for the enterprising investor, having passed 2 out of 5 tests.

Valuation:

Our valuation model finds a fair value to be around $40. 

Opinion:

Since the company is currently trading at about $59, we feel it is overvalued at the present time but could have potential in the future.  This is a company that has a strong history and future prospects but has not had as good a record over the last 10 years as we’d like, and seems to be overvalued. 

None of the staff of ModernGraham.com held a position in Honeywell at the time of publication.  Also, please read our disclaimer and Our Methods.