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Honeywell Could Reach $70 By 2013

March 30, 2012 | About:
Honeywell (HON) is broken into four main segments: aerospace, automation and control solutions, specialty materials, and transport systems. These segments make up 32%, 41%, 14% and 13% of revenues respectively. It is also a very global company with over half of sales coming from products sold outside the U.S. This is excellent given the current state of the global economy. Honeywell isn't too tied to any one economy or company so the various geographies should be able to make up for any decreases in others, at least in the short term.

Honeywell's market cap of $46.8 billion puts it behind competitorUnited Technologies (UTX) with a market cap of $77.7 billion, but ahead of Rockwell Collins (COL) at $8.59 billion and Goodrich (GR) at $15.9 billion. United Technologies is actually preparing to acquire Goodrich to help focus its efforts. To help fund the purchase United Technology is off loading its rocket engine making company. It realized that this is a losing effort with the space program's budget being drastically cut.

Prior to this merger United Technologies needed to purchase many of the systems and products that it will now have in-house with the purchase of Goodrich. Unfortunately for Honeywell, this is a loss of potential revenue for those types of systems. In addition, it allows United Technologies to offer more complete packages to its customers. It should help lower prices and make them a better option as customers are looking for reliable equipment for a good price. Honeywell is also competing against United Technologies's Pratt and Whitney in the manufacture of aircraft engines.

Rockwell Collins doesn't do aircraft engines, but it still makes many of the other systems that Honeywell does. According to several news releases on Rockwell's website it is winning contracts in China and other countries in that part of the world. Honeywell has a few contracts mentioned on its site in China and the Middle East, but not nearly as many as Rockwell. Honeywell does have one that talks up its system that is used on the Boeing 787, however. The only problem with that is that Boeing (BA) is investing so much time trying to get the 787 to market, some are wondering how many more times delivery will be delayed.

Rockwell is actively pursuing revenue growth outside of America. It is taking advantage of companies not able to afford new fleets but needing to upgrade older technologies and targeting those companies. Rockwell is also more focused on aero systems support while Honeywell is a more diversified company. Honeywell may need to take a lesson from United Technologies and decide what businesses are at its core and sell off ones that aren't helping it be successful. For example, as mentioned above, the transportation systems segment is only 13% of revenues. It already sold off some of the segment but I think it needs to keep going and sell the rest, and then use that money to buy a smaller company to further its aerospace business, or invest it in organic growth.

Honeywell's 2011 results reported a 13% increase in sales because new product launches and expanding into high growth markets. It has been able to successfully weather decreases in defense spending and is fairly certain that it can continue to do so in the future. It sold its car-care products and used some of that money to fund restructuring and other efforts to increase efficiency. In a recent release the company reaffirmed its 2012 outlook and narrowed first quarter EPS to the higher end of $0.96-$0.98 per share. I see small growth in revenues, absent any excellent new products next year; I figure it will slow to around 7% for 2012. But, because of the money spent to increase efficiencies I think we'll see margins get better. For 2011 operating margins were 14.7% and I think they could get up to 16% for 2012.

At its latest investor conference there were a few interesting items mentioned. First was an unannounced OEM figure of near $20 billion in the aerospace segment. This should hopefully help support growth over the coming years. Next was all the talk about meeting the 2014 targets and comparing everything to where Honeywell was in2002. While that is all well and good, I think the focus needs to be on some of the more recent struggles (margins), how it is adjusting to fix its issues, and planning out past 2014. Over the last few years Honeywell has seen margins remain flat or shrink slightly. It has acknowledged that it needs to work on improving them. I think we need to watch the coming quarters to see if the money it's spending on increasing efficiencies is being effective. The presentation also discussed its acquisition strategy. As of the end of fiscal 2011 the company had just over $4 billion in cash on the books and generated over half that in cash flow over the last 12 months. It could continue to acquire smaller new companies to help continue growth, but I think it needs to focus some more on organic growth. For example it mentions that back near 2002 sales were around $22 billion and currently sales are around $36 billion. But it also mentions that $10 billion of that increase was from acquisitions, that leaves only $4 billion as organic growth. The concern is that Honeywell will run out of companies to buy or face slowed growth if it can't better develop organic growth.

I look for shares to be near $70 for end of 2012. I think shares at this level are a good buy. I also see a steadily increasing dividend as the company continues to reward shareholders. Honeywell has done a good job of rewarding shareholders with dividends and is a buy for that reason alone. It is a sustainable dividend from a company that isn't going anywhere anytime soon. It won't be a growth play anytime soon though.

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