On Nov 30, we updated the research report on industrial goods manufacturer, Honeywell International Inc. HON.
With a flexible yet disciplined focus on cost and productivity, Honeywell aims to increase its presence in high-growth regions. Population growth, urbanization and infrastructure development continue to create attractive opportunities across its entire portfolio. The company’s balanced mix of long- and short-cycle businesses, along with a decent organic growth in new products and expansion in high-growth regions augur well for the long term. Additionally, the company is building a robust pipeline of new products.
Honeywell regularly fine tunes its portfolio. It has sold about 60 of its units (accounting for $7 billion in sales) since 2002 and acquired 90 companies, contributing $14 billion in revenues over the same period. The focused approach bodes well for its growth.
The company has outperformed the industry with an average year-to-date return of 32.3% against a decline 4.4% for the latter. Honeywell’s diversified business portfolio has the potential to earn consistent above-average returns and mitigate operating risks. The company’s diligent focus on working capital management, free cash flow generation and a conservative balance sheet remain key positives amid a challenging macroeconomic environment.
However, Honeywell is susceptible to material price inflation, which affects profitability. Although the company’s proactive restructuring initiatives have positioned it better than many of its peers, it is yet to witness signs of stabilization in a number of its major end markets. A change in the U.S. government’s defense and aerospace funding could also adversely impact sales of Aerospace’s products and services. The high research and development costs could also be a drag on the Aerospace segment and result in margin contraction.
Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry are Danaher Corporation DHR, Federal Signal Corporation FSS and Leucadia National Corporation LUK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Danaher has a long-term earnings growth expectation of 10.6%. It has surpassed estimates in each of the trailing four quarters with an average positive surprise of 2.6%.
Federal Signal has delivered an earnings beat thrice in the trailing four quarters with an average positive surprise of 11.5%.
Leucadia has an expected long-term earnings growth rate of 18%. It has exceeded estimates thrice in the last four quarters with an average beat of 21.2%.
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