Honeywell Suits Up

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When recession strikes, investors often seek safe havens in large, stable companies whose operations have survived the test of time. But one such company -- one of the biggest of the big, Honeywell (NYSE: HON) -- just got a whole lot less safe. Curiously, it's an attempt to expand its safety business that's to blame.

Honeywell bid $1.2 billion on Friday to acquire privately held Norcross Safety Products. By Monday, ratings agency Fitch had downgraded Honeywell's debt, saying the firm is highly leveraged already. Indeed, Honeywell's debt-to-equity ratio is nearly twice that of peers United Tech (NYSE: UTX) and Johnson Controls (NYSE: JCI). But that's not the only reason to look askance at the deal. Let's take a look at a few other metrics.

Buy the numbers
Norcross made $609 million in sales in fiscal 2007, putting Honeywell's bid at roughly 2 times sales. However, Honeywell's own stock fetches just 1.2 times sales. Why would Honeywell pay such a premium? Two possibilities suggest themselves: Norcross' sales may be more profitable than Honeywell's, or they may be growing much faster.

Profits
We can quickly lay theory No. 1 to rest, however. As it turns out, Honeywell earns a 12.3% operating margin on its revenue. Norcross earns just 12.2%.

Granted, the division that would absorb Norcross, Honeywell's automation and control solutions (ACS) unit, earns just an 11.2% operating margin. So, to an extent, buying Norcross would improve profitability in ACS, which is Honeywell's largest unit by revenue. Still, adding a slightly more profitable small business to a slightly less profitable business that is 10 times larger -- Honeywell made $12.5 billion in sales at ACS last year -- isn't going to move the needle much. It certainly won't bring Honeywell's profitability up to the levels of industry rivals like Emerson Electric (NYSE: EMR), General Electric (NYSE: GE), Goodrich (NYSE: GR), or 3M (NYSE: MMM).

Growth
That leaves growth as the more likely motivation, and indeed, Honeywell says, "This acquisition provides Honeywell with a complete platform in a fragmented, global segment which is expected to yield substantial growth opportunities." [Emphasis added.]

Norcross has grown sales at 13.5% over the last five years, and operating income by 14%. And Honeywell? It's 9.2% and 11.2%, respectively. At first glance, this suggests that Norcross would indeed juice Honeywell's returns. Further digging, however, shows that Honeywell's ACS division in particular has grown sales at 12.3% and profits at 10.3%.

Foolish takeaway
To this Fool's eye, Norcross just isn't growing faster than Honeywell's ACS unit to a degree that would justify the 60% price-to-sales premium that Honeywell's offering to ante up. In the end, this looks to me like anything but a safe buy.

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