Honeywell International Inc. ($HON): Earnings Analysis

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Honeywell International Inc. ($HON): Earnings Analysis

Honeywell International Inc. (NYSE:HON) reports preliminary financial results for the quarter ended 2012-09-30.

Honeywell International Inc. (NYSE:HON) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit
Honeywell International Inc. (NYSE:HON)’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 (PINK:BAESY), 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

Graph of Revenues Trend for Honeywell International Inc. (NYSE:HON)
Graph of Revenues Trend for Honeywell International Inc. (NYSE:HON)
Graph of Net Margin Trend for Honeywell International Inc. (NYSE:HON)
Graph of Net Margin Trend for Honeywell International Inc. (NYSE:HON)
Graph of Accruals Trend (% revenues, Quarterly) for Honeywell International Inc. (NYSE:HON)
Graph of Accruals Trend (% revenues, Annual or TTM) for Honeywell International Inc. (NYSE:HON)

Company Profile

Honeywell International, Inc. is a diversified technology and manufacturing company. It manufactures aerospace products, control technologies, power generation systems, specialty chemicals, fibers, plastics and electronic materials. The company provides a variety of services to its 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, process technology for refining and petrochemicals, and energy efficient products and solutions for homes, business and transportation. Honeywell International operates through four reportable business segments: Aerospace, Automation and Control Solutions, Transportation Systems, Performance Materials and Technologies. The Aerospace segment provides integrated avionics, engines, systems and service solutions for aircraft manufacturers, airlines, business and general aviation, military, space and airport operations. The Automation and Control Solutions segment provides environmental and combustion controls, sensing controls, security and life safety products and services, scanning and mobility devices and process automation and building solutions and services for homes, buildings and industrial facilities. Performance Materials and Technologies segment provides customers with 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. The Transportation Systems segment manufactures engine boosting systems for passenger cars and commercial vehicles, and also provides automotive care and braking products. The company was founded in 1885 by Albert M. Butz and is headquartered in Morristown, NJ.


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