This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

"Honey" pie, you are making me crazy ...
Wall Street is in love with Honeywell (NYSE: HON  ) , but don't call the analysts "lazy" (do people still listen to the Beatles?). In what's already shaping up to be a busy week for upgrades and downgrades, Citigroup worked overtime to crank out one final report last night. Citing a shift in preference to companies "better positioned for a choppier and slower growth environment," Citigroup tapped Honeywell as its first candidate for a "buy" rating.

Why? For several reasons, actually. Citi praises "Honeywell's execution and its exposure to megatrend catalysts in energy efficiency across nearly all of its businesses." The banker sees a potential for cost savings in Europe to bolster profit margins, even if revenues decline next year. And noting the surprising strength in aircraft sales at Airbus and Boeing (NYSE: BA  ) lately, Citi points out that Honeywell "has the sector-highest exposure to Aero at 28% of revenues."

Of course, while it's true that Honeywell gets more revenues from aerospace than does the 800-pound gorilla of this industry, General Electric (NYSE: GE  ) , I feel compelled to point out that the Pratt & Whitney, Hamilton Sundstrand, and Sikorsky divisions at United Technologies (NYSE: UTX  ) contribute about 46% of that company's revenues. But let's not quibble over details. The point is that when you weigh the pluses and minuses, the P/E and the profit growth estimates, Citi thinks that Honeywell sells for "a meaningful discount to peers" and offers an "attractive" valuation today.

And on this point, at least, I agree wholeheartedly with Citi.

Valuation matters
Why do I say this? Because the numbers just make sense. I mean, sure, one can argue that Honeywell seems pricey at 15.2 times earnings. Aerospace peers Boeing, Lockheed Martin (NYSE: LMT  ) , and United Tech can be had for anywhere from 14 times earnings to as low as 9. Rival industrialist Emerson Electric (NYSE: EMR  ) sells for a P/E roughly equal to Honeywell's, while Johnson Controls costs only 13.1 times earnings. But if you look a little closer, you'll see that 15 times earnings really isn't that expensive for Honeywell.

Most analysts expect to grow earnings at 16% per year over the next five years. When you consider that Honeywell has hedged its bets well in the airliner wars, winning contracts to supply key systems aboard both Boeing's fast-selling 787 Dreamliner and its uber-successful 737 line of aircraft, and aboard Airbus's A320neo challenger as well, I'd say that the growth rate analysts are projecting should be achievable.

And if you assume the 16% growth rate as fact, and then factor in Honeywell's healthy 2.8% dividend yield, I'd argue that the stock looks cheap at 15 times earnings.

Long story short, Citi's picked another winner this week. And investors at today's prices are getting a "Honey" of a deal.

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