The industrial company has delivered the kind of results for a decade that GE is now hoping to produce.
Long-suffering General Electric shareholders had cause to cheer last month when the conglomerate announced it would shed its finance arm to focus on its core industrial business. Honeywell International investors may have even more reason to celebrate. Through the huge overhaul, GE has indicated that it can deliver 10% earnings growth annually from its industrial side in the next four years, compared with about half that in its previous form. But Honeywell, an established industrial player, remade itself more than a decade ago and has been delivering on promises of 10%-plus profit growth ever since. It expects to continue to generate that level of growth over the next five years, and, based on its record, there’s every reason to believe it.
In contrast to GE (ticker: GE), which saw its shares lose 33% of their value in the past 13 years as its strategy meandered and its massive financial operations foundered, Honeywell’s stock (HON) has risen 200%. Sales have nearly doubled to $40 billion, and its market value has mushroomed to $80 billion from $20 billion.
Honeywell CEO David Cote has made good on his promises. Photo: Gary Spector for Barron's
The Morristown, N.J.–based company has achieved this growth by successfully managing scores of products, ranging from its familiar home thermostats to sophisticated airplane-cockpit controls to security systems and turbochargers.
Having met an aggressive five-year growth plan that ended in 2014, Honeywell has greater ambitions today. “The stuff that we have coming is even more exciting than the stuff we’ve already done,” says David Cote, the outspoken chief executive responsible for revamping and reinvigorating Honeywell since coming on board in 2002. “We do a very good job of ‘seed planting,’ ” says the GE alumnus and onetime contender to succeed former CEO Jack Welch.
With most of Honeywell’s major businesses doing well, its shares, trading last week at $101.58 -- 16.6 times this year’s expected earnings -- could appreciate by about 20% in the next year and by close to 50% longer term. That’s if it continues to live up to its forecasts and to improve margins. After a recent dividend hike, the stock yields 2%. Shareholders of GE, which fetches a premium to Honeywell, face a more uncertain path.
“Whatever GE can grow at, Honeywell can grow faster and with less risk,” says Scott Lawson, portfolio manager and industrials analyst at Dallas-based Westwood Holdings Group, with $20 billion under management. He expects Honeywell to increase earnings by 12% a year in the next three years, based on management projections. “I am making the assumption Honeywell management will perform with the consistency and proficiency they’ve displayed in the past 10 years,” says Lawson.
HONEYWELL DIVIDES ITS BUSINESSES into three segments: aerospace and avionics, which are responsible for 39% of sales; automation and controls, which kicks in 36%; and performance materials, which contributes 25%.
Aerospace is benefiting from new contracts and more flight hours, while avionics has gained market share, aided by strong demand for its cockpit systems. The segment also should get a lift as U.S. defense spending stabilizes and foreign defense budgets expand.
The automation and control unit, which includes heating, cooling, lighting, and security systems for homes and businesses, is expected to grow 4% to 5% annually over the next few years. Commercial sales have been picking up, and demand for “smart” systems and energy-efficient buildings plays to Honeywell strengths.
Even the performance-materials unit, which has been affected by the ailing oil and gas industry, is expected to make a strong contribution. One big opportunity is its Solstice air-conditioning refrigerant, which stands to gain as European countries require new cars to use a low global-warming refrigerant. That should help the group generate 5% to 6% sales growth.
