Are There Blue Skies Ahead For This Aerospace Giant?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Honeywell International (NYSE: HON) is the world’s largest manufacturer of avionics and small jet engines, and also produces a variety of other products. Although the company’s revenues took a hit as a result of the recession, things are certainly back on track now. In fact, 2012’s sales were higher than they ever were before, and 2013 is projected to be even higher. With shares trading just under their all-time highs, should investors take their profits and head for the exits, or is there another leg up for Honeywell? 

<img alt="" src="http://g.fool.com/editorial/images/52470/hon-revenue_large.png" />

Honeywell as an investment…

Honeywell operates its business through four segments, which make up the headings below. As an investment, Honeywell still looks very fairly valued, despite the recent gains. Shares trade for 15.8 times this year’s expected earnings, which are expected to grow at a very nice rate over the next few years due to the rising demand for new aircraft and the growing trend towards energy efficiency. Honeywell is projected to earn $5.52 and $6.06 per share in 2014 and 2015, respectively, which corresponds to annual earnings growth of 11.5% and 9.8%, which more than justify the P/E.

Also worth mentioning is Honeywell’s very strong balance sheet, which the company has strengthened even further in recent years. The company has greatly improved its cash/debt ratio, a great sign of financial health, and can be seen in the chart below. Notice how much closer together the two lines are now than they have been in the past.

<img alt="" src="http://g.fool.com/editorial/images/52470/hon-cash-vs-debt_large.png" />

Before jumping in, let’s take a quick look at what Honeywell does, who they compete with, and if our investment dollars would be put to better use with one of them.

Aerospace

The aerospace segment is perhaps Honeywell’s most well-known, producing various products for both commercial and military aircraft, and accounting for 32% of the company’s sales. Examples include cockpit controls, avionics, safety systems, electric power systems, and brakes, just to name a few. The company also manufactures jet engines for smaller regional and business jets. Major competitors to this aspect of Honeywell’s business include United Technology (NYSE: UTX), whose Pratt & Whitney brand of jet engines and accessories are meant for the same applications as Honeywell’s.

In addition to their jet engines, United Technologies produces helicopters under the Sikorsky name, elevators, and Carrier air conditioners, to name a few of their products. Shares of the company trade for a cheaper 15.1 times 2013’s earnings as well as pay a slightly better dividend yield (2.28% vs. 2.1%) than Honeywell. Earnings are actually projected to grow slightly faster as well, at 13.6% and 12.1% over the next two years. It is worth noting that United Tech has a much more leveraged balance sheet, with over $21.5 billion in debt and just $4.8 billion in cash.

Automation and Controls

Honeywell’s largest segment at 42% of the company’s sales, automation and control’s products include a variety of environmental and combustion controls, sensory, security products, and building solutions products. This segment produces an extremely wide range of products, and is the clear leader in the market; hence there are no “direct” competitors.

Performance Materials

This segment produces specialty chemicals and fibers for a variety of applications and makes up 16% of Honeywell’s revenues. These products include resins, fluorocarbons, research chemicals, advanced fibers, health care and packaging films, absorbents, and more. There are no shortage of competitors in this space, and my favorite investment in the sector is Dow Chemical (NYSE: DOW), so let’s see how the two compare as investments.

Dow is the largest U.S. chemical company, with sales of about $60 billion annually. The company produces an enormous variety of chemical products for almost every industry that has a use for chemicals. As an investment, Dow is a tremendous bargain right now, trading for just 13.9 times this year’s earnings, with a phenomenal 21% forward earnings growth rate projected for the next three years. The downside is that Dow is 100% dependent on the volatile and cyclical chemical industry, but the fact that it is the industry leader gives it some pricing power and other advantages.

Transportation Systems

Honeywell’s smallest segment at just 10% of sales, the transportation systems segment produces turbochargers for gas and diesel engines as well as radiators, brakes, and other products. There are very few publicly-traded direct competitors to this segment, but an alternative may be an investment in one of the automakers, who all produce their own line of automotive performance parts.

Conclusion

While Honeywell isn’t exactly expensive at the current share price, there are cheaper options out there to substitute for most aspects of the company’s business. For current shareholders, this may be a good time to take at least some of your profits off of the table and start “bargain-hunting” for some of these cheaper alternatives.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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