Honeywell International (HON), the diversified technology and manufacturing company, is well-positioned and should see an increase in sales through expansion in the coming five years. There are various aspects that are driving Honeywell's business, and they can help the stock do much better than the flat performance it has put in so far in 2014.
Honeywell is doing well as its turbo business is providing turbo chargers for commercial and passenger vehicles. Honeywell's Garrett Turbocharger division is a key driver for the company’s success as the segment has performed strongly with revenue of $3 billion, accounting for about 8% of the company’s total operating margins.
The Garrett turbocharger segment should prove to be the primary growth driver of the company’s revenue as a result of increase in sales and profit, resulting from expansion. As the turbocharger comprises of various parts which range in the price band of about $150 to several hundred dollars, the company can expect good income from sales of turbocharger parts.
"We estimate average selling price at roughly $300 per unit, with ASPs declining 1% to 2% each year for existing platform production," Deutsche Bank analyst John Inch said in a client note.
Out of Honeywell’s turbo business, the company gains mostly from the original equipment business. The original equipment business contributes about 90% of sales. On the other hand, turbo sales are roughly split in 80% and 20% for passenger vehicles and commercial vehicles, respectively. Honeywell has some top brands as its customers such as Ford, Hyundai, Peugeot Citroen, Volkswagen, and Honda.
Honeywell’s outperforming turbo business resulted in fantastic revenue growth in the last quarter. In the future, Honeywell is expecting the top line to grow more as a result of its accelerating penetration in gasoline combustion engines, especially in North America. The company is expecting the market to progress well, so it is also expecting good results from emerging markets in Europe.
According to John Inch of Deutsche Bank, "A turbocharged passenger vehicle gasoline engine can deliver up to 20% better fuel economy over a non-turbocharged equivalent. The efficiency savings move higher as a turbo enables comparable performance as measured in horse power of a smaller displacement engine with a turbocharger compared with a larger engine without a turbocharger.”
There are several other factors that are expected to be growth drivers for Honeywell in the future. The company is seeing a rise in global fuel efficiencies, which will result in increased turbo penetration. In Europe and China, Honeywell is expecting a boost in mileage standards, thereby leading to the need for more turbochargers.
Inch wrote, "Based on its high win rate, Honeywell would appear to have significant visibility toward robust turbo growth for at least the next five years, with gasoline turbo prospectively realizing in excess of 20% CAGR for the company.”
Looking at the present scenario, turbo chargers are well in line with the company's strategies and it is robust in its outlook. Honeywell is positioned to generate $4.5 billion in revenue by 2017. With the increased top-line projections the operating profit is also expected to increase by 20%.
During this time frame the company is adding no capacity, but it is focusing mainly on profitability arising from gasoline turbo.
For the future, Honeywell expects its tax rate to be 20%. This might give an advantage to the turbocharger division to increase its earnings, which in turn will help it to attract more investors, ultimately resulting in market share gains in the future.