A recent Benzinga article provided the following highlights:
- Honeywell International Inc. (HON, Financial) may be a better purchase than General Electric (GE, Financial).
- Further, "In our opinion, Honeywell fundamentals have continued to line up more favorably over the past few weeks," the analysts began. "We believe there to be an abundance of favorable Honeywell attributes that should allow Honeywell to outperform GE."
As a conservative investor, it may be difficult to be confident in forecasts. Nevertheless, assuming a conservative/acceptable growth rate is necessary in calculating an intrinsic value – more on this later.
Four interesting facts about Honeywell:
- 110-year-old company.
- $300,000 revenue dollars per employee in 2015.
- David M. Cote, 63, has been CEO since 2002 (14 years).
- Market capitalization of $82.68 billion (March 8).
Four interesting facts about General Electric:
- 123-year-old company.
- $385,000 revenue dollars per employee in 2015.
- Jeffrey Immelt, 60, has been CEO since 2001 (15 years).
- Market capitalization of $282.62 billion (March 8).
* Figures are estimations by the author.
Market price action
Visually, Honeywell has been performing almost on par with the Standard & Poor's 500, while GE has lagged tremendously.
Numerically, Honeywell has returned 250% to its shareholders since Jan. 1, 2001, 101% for S&P 500, and GE just 12%.
The numbers
Revenue in millions
GE, no doubt, beats Honeywell in terms of revenue numbers. GE has roughly two to three times larger revenue than Honeywell. In 2006, GE sales were 8x larger than Honeywell’s.
Revenue growth
Revenue growth significantly dropped for GE in 2015; this was worse than what happened during the Great Recession.
Profits in millions
GE lost $6 billion in profits in 2015, while Honeywell grew its profits in the same year.
Profit growth
Ugly 2015 number for GE.
Free cash flow
GE, an assumption, can easily support its dividends and share buybacks as it is empowered by its bountiful cash flow.
Free cash flow growth
GE, nevertheless, has had negative cash flow growth since 2011.
Book value
Since the Great Recession, Honeywell outgrew GE in terms of book value.
Book value growth
There is some correlation between the two great companies. However, Honeywell outperformed GE in this metric again.
Debt to equity
GE has been reducing its debt, as it seems, for the past decade. Honeywell would have fit my stringent criteria of companies having
% dividend and share buybacks of profits
Excluding GE’s poor 2015 performance, both companies are considerably conservative in terms of providing dividends and share buybacks to their shareholders.
% dividend and share buybacks of free cash flow
Conservatively acceptable.
Valuations
Price to earnings
* As previously stated, GE recorded negative $6 billion in profits; TTM earnings per share is -59 cents.
Price to book value
Honeywell is overvalued in terms of P/BV ratio.
Intrinsic value calculation
Simple multiple
* Not applicable to GE secondary to recent negative earnings per share.
Capital Asset Pricing Model (CAPM)
Honeywell 10-year growth assumption (using Yahoo! Finance)
* I will probably use the least growth performance that Honeywell had achieved so far and that is 6.4%.
GE 10-year growth assumption
* GE has performed poorly in recent years, but to be fair, I will probably just average its previous five and next five years to arrive at an acceptable growth rate, and that is 5.665%.
Honeywell CAPM (conservative)
Honeywell CAPM (aggressive)
* I figured my calculation would be fair if I included aggressive growth figures. For the 10-year growth rate, I will average analysts’ estimation of the previous and next five years’ growth rate and that will be 9.87%, and upgrade the terminal growth rate to 4% thus arriving at $65 per share value.
* Other information not included in the graphs were as follows: 10-year Treasury rate of 1.81% was used for risk-free rate, beta average of 1.1 from different financial resources, equity risk premium from Professor Aswath Damodoran’s NYU Stern data and corporate debt interest rate of 5.45% and tax rate of 26.4%.
Therefore, my Honeywell International intrinsic value calculation revealed:
Definitely I do not value Honeywell International the same as Mr. Market does currently.
GE’s conservative CAPM, on the other hand:
Ouch!
GE aggressive CAPM (using 8% 10-year growth rate, and 4% terminal growth rate)
In average:
Well, it seems I failed to find value in both companies. One "culprit" of GE’s very low value calculation is its excessive number of shares outstanding. Nevertheless, my calculations are just my calculations. There are other, probably better, ways of determining intrinsic values of companies.
Takeaway, I find Honeywell International a better business operator in the industry compared to GE in hindsight. Deutsche Bank claims that Honeywell International can still outperform GE in the future. I guess I just have to sit on the sidelines and watch what happens.
Happy investing!
Mark Yu
