Monday, 20 July 2015

Honeywell - impressive numbers last Friday but in potential today overshadowed by GE

I wrote last Friday (link here) about General Electric and the continued simplification of their business. On the same day the smaller (a mere US$83bn+ market cap!) industrial conglomerate peer Honeywell also reported.

Honeywell may not be carving out great chunks of a financial business nor striking transatlantic deals to bolster their industrial operations but judging by their share price performance over the last couple of years they have been executing far more strongly than GE:

Now as I noted in my linked write-up above GE retain considerable potential prospective share price appreciation scope as they simplify their business and make returns to shareholders.  How about the historically strong performing Honeywell?

In terms of last Friday's results what was immediately striking was - like GE - they contained a small upping of guidance: 

Also like GE the oil and gas divisional operations stood out overtly as a negative performer.  Just like GE this is only a minority proportion of sales.  Strikingly the top three divisional areas by sales proportion all have clearly above neutral current sales momentum trends.

And this is reflected in the FY15 guidance from Honeywell where high single digit / low double digit increases in profit, net income, EPS and free cash flow are anticipated.  That's pretty impressive particularly as there is some negative FX exposure which impacts the headline sales line.

So to put some of these numbers into context, a near Euro81bn EV puts the mid-range EV/ebit multiple at just over x11 for FY15e and the free cash flow yield at just over 5% (the latter being a metric I used to calculate my target GE share price of c. Euro30).  

Honeywell has its own ongoing productivity and performance enhancing initiatives just as I have highlighted for GE.  For me at the margin the greater opportunity is currently with GE.  Honeywell is a quality performer however.  Any break towards a single digit EV/ebit FY15e metric (getting near Euro95) is a real opportunity and frankly if you made some half-reasonable assumptions about 2016 you may even make the shares work for you near prevailing.  

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