Watching Aerospace for the Long Term

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

Sometimes, it's very difficult to choose a stock for investment and determining whether it will be worthy for the long haul. But, when you have both the essential points, i.e. fundamentals and financials, you don’t have to worry about picking the right stock. My pick today, Honeywell International (NYSE: HON), is such a stock supported by its heavy contract backlog.

The chart below details the past three year returns for Honeywell International in comparison with the S&P 500.

<table> <tbody> <tr> <td> <p><strong>Ticker</strong><strong></strong></p> </td> <td> <p><strong>1 month returns</strong><strong></strong></p> </td> <td> <p><strong>YTD returns</strong><strong></strong></p> </td> <td> <p><strong>1 year returns</strong><strong></strong></p> </td> <td> <p><strong>2 year returns</strong><strong></strong></p> </td> </tr> <tr> <td> <p>Honeywell International</p> </td> <td> <p>0.16%</p> </td> <td> <p>10.36%</p> </td> <td> <p>13.28%</p> </td> <td> <p>23.40%</p> </td> </tr> <tr> <td> <p>S&P 500 Total Return</p> </td> <td> <p>0.27%</p> </td> <td> <p>10.88%</p> </td> <td> <p>13.55%</p> </td> <td> <p>19.94%</p> </td> </tr> </tbody> </table>

Honeywell’s stock is currently trading around $60.57 with a yearly gain of ~13%. From an investor’s perspective, I believe Honeywell International is a good pick with its deep rooted diversified portfolio across 300+ platforms and because of its leading position in the industry.

In comparison to its competitors, its closest peer is United Technologies Corp. (NYSE: UTX) which has completed its largest ever deal with Goodrich. The acquisition is expected to enhance United’s presence in the Aerospace segment. Other than this deal, United Technologies has also won a contract from the U.S. Army to conduct R&D on AVSPOT (Advanced Variable-Speed Power Turbine) in order to fulfill the requirements of Range and Lift for the current and future force Rotocraft.

Earlier in June, Honeywell International had received Ford’s (NYSE: F) silver-level World Excellence Award for its exceptional performance in the supply deal with Ford in 2011. Honeywell won marks for its qualitative and timely supply of turbochargers which enhance the fuel efficiency of engines. The past and current economic conditions which are heavily loaded with recession consequences and rising oil prices have increased the demand for fuel efficient vehicles. With this scenario Honeywell is all set to avail the growth opportunity with its turbochargers which also gives manufacturers the ability to shrink engine size and weight. Ford’s has won awards for its EcoBoost technology for Ford Fusion. Further on, Ford plans to equip 90% of its North American fleet with the EcoBoost engine or transmission technology by 2013. Please read my detailed article on Ford here.

Let’s take a look at how Honeywell International has prepared its strategies to maintain the continuing flow of record earnings.

Contract Winnings

Boeing has contracted with Honeywell International for the 737MAX aircraft for the supply of electronic bleed air system that keeps the cabin pressure in control and helps in getting ice off the wings. Honeywell is the largest supplier for the 737MAX which is a new aircraft in the Boeing family, scheduled for first delivery in 2017. The year to date orders for the Boeing 737MAX aircraft from different aviation companies totals to 1009.

China Eastern Airline

China Eastern Airlines has entered into a deal with Honeywell for its Boeing 737 NG aircraft and 50 new Airbus A320 aircraft. Honeywell will supply the wheels and brakes for both new and existing 737 NG aircraft and Airbus which are scheduled to be delivered in the next three years. China Eastern has chosen Honeywell for its modern fleet line of cost efficient, reliable and safe landing systems. The growing spending power of the Chinese population has increased the passenger demand.

Indian Jaguar Re-Engining

The Indian air force (IAF) has decided to purchase 270 F-125IN turbofan engines for its Jaguar fleet from Honeywell. This re-engining deal is expected to be worth $700 million for the total order of 270 engines which will be executed in two phases. The first phase is a trial for two Jaguars to be completed in 2015 – 2016 and the rest will be taken over by Hindustan Aeronautics Limited (HAL) in back to back contracts with Honeywell to be completed by 2023.

New Growth Area

Other than aerospace, Honeywell has found growth opportunities in other business areas also. Honeywell has won a logistics support contract worth $181 million for F-18 fighters for Naval Supply Systems Command (NAVSUP). The company has a history of providing reliable logistics supply to the Defense Department maintaining the efficiency and also in cost savings through lower maintenance cost.

Summing up, the company’s backlog is trending well with its continuous contract winning capabilities. The safe systems and on time delivery is an impressive feature which helps it in winning new contracts and also in extending the older ones. Honeywell’s contract acquisition ranging from the emerging markets (China and India) to the U.S. brings its year to date total of $1 billion in international business wins and over $200 million expected to announce soon including in the ME, Asia and Europe. Additionally, what’s more appealing for the stock is its high dividend yield and attractive PEG ratio of 0.98, offering a good buy point.


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford. 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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