Has Honeywell Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Honeywell (NYSE: HON  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Honeywell.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.7% Fail
  1-Year Revenue Growth > 12% 8.3% Fail
Margins Gross Margin > 35% 22% Fail
  Net Margin > 15% 6.1% Fail
Balance Sheet Debt to Equity < 50% 66% Fail
  Current Ratio > 1.3 1.30 Pass
Opportunities Return on Equity > 15% 17.4% Pass
Valuation Normalized P/E < 20 28.23 Fail
Dividends Current Yield > 2% 2.6% Pass
  5-Year Dividend Growth > 10% 8.7% Fail
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Honeywell last year, the company has lost two points. A jump of almost 30% in the shares helped boost valuation above critical levels, but decelerating revenue growth is of somewhat greater concern to the business.

Honeywell is tied closely to the aerospace industry. Producing a variety of different systems and components for both commercial and military aircraft, Honeywell's business is economically sensitive and also dependent in large part on government expenditures.

Conditions in the commercial area are extremely strong. Boeing (NYSE: BA  ) has an impressive backlog of orders that should last for years, and as long as the company can actually deliver on those orders, it should reap the long-term rewards. Moreover, component-makers United Technologies and General Electric (NYSE: GE  ) expect to share in the wealth from high aircraft demand, and Honeywell's most recent earnings report has already demonstrated its ability to join those giants and stake its own claim to growth in the sector.

Still, Honeywell faces challenges. The same fears of a global slowdown that have hit United Technologies also represent a headwind to Honeywell's success. Moreover, competition is fierce, especially as companies with defense exposure do their best to broaden their markets and diversify away from exposure to cash-strapped government budgets. Cummins (NYSE: CMI  ) and Caterpillar (NYSE: CAT  ) have both fought hard to carve out niches in components and equipment that competes against Honeywell.

Honeywell will have a tough time improving, because it desperately needs to improve margins despite having a lot of competition. A return to stable economic worldwide growth would go a long way toward restoring Honeywell's upward trajectory.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Honeywell investors can learn a lot from the challenges that conglomerate GE has had to overcome. Learn all about them in the Fool's premium report on General Electric. You can't afford to miss our top analysts' commentary. Try it out today.

Click here to add Honeywell to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Cummins. 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 Fool has a disclosure policy.


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