1. Honeywell International Inc. (NYSE: HON)
Number of Hedge Fund Holders: 45
Market Cap: $158.989 billion
Being a leader in digitization, Honeywell International is at the forefront of delivering software and services that help customers in overcoming uncertain competitive pressures to achieve business outcomes. Its industrial automation and control segment provides a wide range of open control systems, software, and other related services worldwide. Honeywell has overdelivered in all guided metrics in the first quarter of 2021 according to the company’s latest issued quarterly report which has earned it the top spot in the 10 best automation stocks for 2021 list. The first quarter sales amounted to $8.5 billion which exceeded the expected range by $250 million. Honeywell also repurchased $0.8 billion worth of its own shares and has made five strategic investments. The adjusted earnings per share is $7.75 and is expected to increase up by 15 cents in the next quarter. Overall, the company reported a total revenue of $32.63 billion in 2020 with a profit margin of 14.18%.
A total of 45 hedge funds tracked by Insider Monkey were bullish HON at the end of the fourth quarter of 2020, up from 41 funds a quarter earlier.
In their Q3 2020 investor letter, Madison Investments highlighted a few stocks and Honeywell International Inc (NYSE:HON) is one of them. Here is what Madison Investments said:
“This quarter we are highlighting Honeywell (HON) as a relative yield example within Industrials. HON is a leading industrial conglomerate with an increasing focus on software and automation. We believe its global scale, history of innovation and strong culture focused on continuous operational efficiency create a sustainable competitive advantage. HON operates four segments including Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. These businesses serve diverse end markets including aerospace, U.S. defense contractors, e-commerce and oil and gas customers.
Our thesis on HON is that it will successfully leverage its software technology across its huge installed base of customers and products. Its installed base includes approximately 36,000 auxiliary power units, 25,000 engines, 20,000 wheels and brakes, 20,000 flight management systems and 10,000 units of communication hardware. Importantly, HON software technology is integrated into mission-critical operations of its customers including cockpit control in aircraft flights, warehouse automation in manufacturing and connected solutions in commercial buildings. We believe its technology advantage is due to above-average spending on research and development (R&D). For example, in key aerospace businesses, HON spends 4.5% of sales on R&D compared to 2-3% spending by most competitors.
The fund purchased HON in the quarter after it reached a reasonable valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the purchase price in the upper $160s, the stock traded for less than 20x estimated earnings expected over the forward 12 months. We believe this valuation can grow over time if HON continues to innovate and create new products, while its underlying end markets like aerospace recover over time. It also has an A rated balance sheet (as rated by S&P), an absolute dividend yield of 2.2%, and an attractive relative yield of 1.3x versus the S&P 500, which is the highest relative yield since 2012, as shown below. The company also has a history of dividend increases as it has grown dividends per share by 12.5% per year on average over the last five years.
Risks to the thesis include a prolonged economic downturn that results in sustainable declines in its key end markets like aerospace. We estimate about 40-45% of sales are exposed to these end markets. Other risks include lost market share if customers don’t like its evolving software offerings, and the risk the company makes a value-destroying acquisition. We think this last risk is relatively low as HON has a history of successful acquisitions.”
You can also take a peek at George Soros’ Top 10 Stock Picks and 15 Most Valuable Cloud Computing Companies.
