Honeywell International Inc.’s analysis versus peers uses the following peer-set: United Technologies Corporation (NYSE:UTX), The Boeing Company (NYSE:BA), Emerson Electric Co. (NYSE:EMR), Lockheed Martin Corporation (NYSE:LMT), Rolls-Royce Holding PLC (PINK:RYCEY), BAE SYSTEMS PLC ORD (PINK:BAESF), Raytheon Company (NYSE:RTN), Safran SA (EPA:SAF) and Rockwell Collins, Inc. (NYSE:COL). The table below shows the preliminary results along with the recent trend for revenues, net income and returns. CapitalCube reported extensively on Boeing Co. (BA) last month.
| Quarterly (USD million) | 2012-09-30 | 2012-06-30 | 2012-03-31 | 2011-12-31 | 2011-09-30 |
|---|---|---|---|---|---|
| Revenues | 9,342.0 | 9,444.0 | 9,304.0 | 9,470.0 | 9,288.0 |
| Revenue Growth % | (1.1) | 1.5 | (1.8) | 2.0 | 2.2 |
| Net Income | 950.0 | 902.0 | 823.0 | (342.0) | 653.0 |
| Net Income Growth % | 5.3 | 9.6 | N/A | (152.4) | (18.0) |
| Net Margin % | 10.2 | 9.6 | 8.8 | (3.6) | 7.0 |
| ROE % (Annualized) | 30.1 | 30.4 | 29.2 | (12.2) | 22.0 |
| ROA % (Annualized) | 9.4 | 9.0 | 8.2 | (3.5) | 6.6 |
Valuation Drivers
Honeywell International Inc.’s current Price/Book of 3.7 is about median in its peer group. The market expects more growth from HON-US than the median of its chosen peers (PE of 21.2 compared to peer median of 13.1) and to improve its current ROE of 18.8% which is around peer median.
The company’s asset efficiency (asset turns of 0.9x) and net profit margins of 6.2% are both median for its peer group. HON-US’s net margin has increased 1.1 percentage points from last year’s low and is now close to its five-year average net margin.
Economic Moat
The company has achieved better revenues growth than its chosen peers (year-on-year change in revenues of 9.4%) but its earnings growth performance has been below the median (change in annual reported earnings of -8.1% compared to the peer median of 17.5%). This suggests that, compared to its peers, the company is focused more on top-line revenues. HON-US is currently converting every 1% of change in revenue into -0.9% change in annual reported earnings.
HON-US’s return on assets currently is around peer median (5.8% vs. peer median 6.7%) — similar to its returns over the past five years (6.4% vs. peer median 6.9%). This performance suggests that the company has no specific competitive advantages relative to its peers.
The company’s gross margin of 30.9% is around peer median suggesting that HON-US’s operations do not benefit from any differentiating pricing advantage. In addition, HON-US’s pre-tax margin of 7.7% is also around the peer median suggesting no operating cost advantage relative to peers.
Growth & Investment Strategy
While HON-US’s revenues have increased more slowly than the peer median (-0.1% vs. 1.3% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 21.2. The stock price may be factoring in some sort of a strategic play.
HON-US’s annualized rate of change in capital of 5.7% over the past three years is around its peer median of 5.0%. This median investment has likewise generated a peer median return on capital of 11.9% averaged over the same three years. This median return on investment implies that company is investing appropriately.
Earnings Quality
HON-US’s net income margin for the last twelve months is around the peer median (6.2% vs. peer median of 7.4%). This average margin and relatively conservative accrual policy (3.5% vs. peer median of 1.4%) suggests possible understatement of its reported net income.
HON-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.
Trend Charts
