Strong Earnings Can't Save Honeywell Stock

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Honeywell's (NYSE: HON  ) earnings report Friday was quickly overshadowed by news reports that one of its devices, an emergency locator transmitter, may be linked to the on-ground fire that broke out in an Ethiopian Airlines-operated Boeing (NYSE: BA  ) 787 at Heathrow Airport last week.

That shouldn't have happened.

Making volcanoes out of molehills
The thought of having high-tech electronics burst into flame aboard a carbon-fiber tube a mile up in the sky makes flyers nervous. It makes investors nervous, too. Understandably so, in both cases.

But Honeywell has manufactured and sold some 6,000 of the transmitters alleged to have played some sort of (still unconfirmed) role in last week's fire. Boeing has delivered only 66 Dreamliners equipped with the device. So even in the worst-case scenario, the risk to Honeywell from this incident seems limited. Indeed, given that there's never been an incident, similar in seriousness to the Ethiopian incident, reported with Honeywell's device -- despite its having logged some 5 million flight hours -- it's entirely possible that this incident poses no risk to Honeywell stock at all.

Meanwhile, that stock is doing just fine, thank you very much.

Honeywell's earnings Friday showed the company growing revenues 3% in Q2 2013. Operating margins improved to 14.3% -- which makes Honeywell more profitable than General Electric (NYSE: GE  ) , which also reported earnings Friday and saw its stock jump 4.6%, and nearly twice as profitable as Boeing, the source of Honeywell's current image problem.

Cash flow from operations at Honeywell grew 29% in comparison to last year's Q2, and with stable capital investment, free cash flow grew 37% (to $1.06 billion) -- much better than the reported 12% growth in earnings per share.

The real problem
So when you get right down to it, Honeywell had a great earnings quarter, and one potentially glitchy transmitter shouldn't detract from it. But the real problem with Honeywell stock isn't the company's products -- it's its own valuation.

Honeywell's stock is up 45% over the past year, you see, largely (I think) on investor hopes of beaucoup profit, as Honeywell supplies plane parts to Boeing and Airbus. Depending on the numbers you look at, the stock now costs a bit less than 21 times (GAAP) earnings. Or it costs a bit more than 21 times trailing free cash flow (of $3.1 billion). Or even a bit less than 18 times the free cash flow Honeywell calculates for itself (excluding contributions to its own pension fund, and to the NARCO asbestos litigation trust fund) for 2012, and estimates it will generate again in 2013.

Any way you cut it, though, all of these valuations are too high. Honeywell earnings, analysts say, will only grow earnings at about 10% annually over the next five years. Even with a 2% dividend yield, that argues in favor of a low-teens valuation on the stock -- not high-teens to low-20s.

Could there be better value in the end-users of Honeywell's products -- the airlines? Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2013, at 5:32 AM, funfundvierzig wrote:

    Speaking of the danger of "fire", another major product spearheaded by Honeywell partner, the DuPont Company, is floundering. That is the DuPont/Honeywell HFO-1234yf, a very expensive coolant for car A/C. For short, we call it the Kullman Koolant after the highest ranking engineer in the DuPont Company and CEO, Ellen J. Kullman.

    Last fall, engineers from Daimler put the Kullman Koolant through their own rigourous independent testing. They were shocked to discover that in a serious crash, the Kullman Koolant could potentially leak on a hot engine part and explode into a toxic lethal gas fireball (deadly hydrogen fluoride gas). Daimler-Benz, VW, and BMW quickly and prudently rejected the Kullman Koolant and are developing other, much safer alternatives. In the meantime, the Kullman Koolant has been effectively banned from a third of the global new car market after DuPont and Honeywell managements had geared up for a complete, unquestioned monopoly. ...funfun..

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2547628, ~/Articles/ArticleHandler.aspx, 9/27/2016 1:35:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 4 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:01 PM
HON $115.94 Down -0.04 -0.03%
Honeywell Internat… CAPS Rating: ****
BA $130.57 Down -1.21 -0.92%
Boeing CAPS Rating: ****
GE $29.54 Down -0.35 -1.17%
General Electric CAPS Rating: ****