Honeywell International (HON, Financial) is doing well. However, the management is having a cautious outlook on the global economy and anticipates a muted revenue outlook for the current fiscal. There is more to this story, which we shall see in detail, but first let’s have a brief look at its numbers for the quarter.
Quarterly performance and more
The company reported revenue of $10.2 billion during the fourth quarter, down marginally from a year ago period while earnings adjusted for onetime costs came at $1.43 a share compared to $1.24 last year. It was mainly driven by its strong business, which was backed by continued momentum across its portfolio. The numbers are quite encouraging considering the slow growth in macroeconomic factors. In fact, it is interesting to note that the management had repeatedly emphasized the macroeconomic headwinds while reporting its fourth-quarter results.
Therefore, it has taken a number of steps to mitigate the effects of these challenges in the upcoming quarters. For example, Honeywell’s strategy for Europe is expected to remain flat this fiscal and considering the present turmoil in the Euro Zone it has hedged more than 80% of its P&L exposure related to the Euro. It will put the company on a safe side and will protect it from the extreme volatilities in the foreign exchange market. This indeed would be a wise step considering the negative impacts it had in the foreign exchange market in the fourth quarter.
The way forward
In addition, the company has struck some strategic deals during the year, which positions it well to continue its growth momentum in the days ahead, one of them being the acquisition of Datamax-ONeil, which is a global manufacturer of fixed and mobile printers used in a variety of retail, warehousing distribution, and healthcare applications.
The deal completed for a sum of $185 million will extend Honeywell’s global reach and provide significant synergies in this segment. Honeywell has been in the fore front of the AIDC (automatic identification and data capture) industry for more than 40 years. With the global barcode printing segment estimated to be around $1.5 billion, Datamax will be a significant growth driver for the company in coming years.
Going forward, Honeywell is preparing for even bigger bets and could meet its goal of $10 billion in acquisitions by the end of 2018. This is significant for a company that was not willing to spend anything larger than $1 billion in M&A two years back.
It is interesting to note that the management had set a five-year target from 2010 to 2014 and was able to successfully complete its objectives. During this period, if we trace the stock movement it had a record rally and rose more than 100% in the past four years. And the company is focused to repeat history with its next five-year target from March 2014 to 2018. The deals we mentioned above will be a significant part of this five year plan. These are valuable facts as we could clearly see the constructive steps taken by the management to take the business forward.
Although it is cautious on the global economy, the company also believes that lower crude prices will boost the economies of oil-consuming countries. This is in line with the consensus of 32 economists, who expect the world economy to grow 3.3% compared to 3% last year. Dave Cote, chief executive officer of Honeywell International, is cautiously optimistic on the global cues on the back of sluggish performance in Europe along with a strong dollar, which is negatively affecting the U.S. exports.
However, there are a lot of positives that would offset these headwinds and boost its growth. M&A is expected to be the leading factor, which has the potential to lead the company to new heights. There are a number of companies that could be a probable target for Honeywell to acquire. It will be a matter of time to see where the management is investing its fortune, which will be the decisive factor to its future performance.
Conclusion
The company currently has a trailing P/E of 19.3 and its forward P/E seems even more impressive at 15.21, indicating further growth in its earnings. The stock had a good rally in the past few years and is presently near its all-time highs. Therefore in the light of these factors Honeywell seems to be on the right track and could be a good long-term bet for investors.
