Industrial giant Honeywell International (NYSE:HON) started the year with fairly bright expectations. It's likely going to end up paring those projections back as the impact of COVID-19 containment efforts pushes countries around the world into recession. That's not a great backdrop for investing in Honeywell, let alone any industrial name.
However, this stock is rarely cheap. Down around 30% so far in 2020, is Honeywell stock a buy at these levels?
The nature of the business
Honeywell is an industrial company, which basically means that it is a cyclical business. When the economy is running briskly the company will usually perform well. In recessionary periods, on the other hand, revenue and earnings are likely to sag alone with the economy. During the deep 2007-to-2009 recession, for example, Honeywell's shares cratered a painful 60%. With that as a backdrop, the roughly 30% decline so far this year seems relatively modest.
That said, it remains to be seen how bad the current downturn ends up being. Honeywell started the year expecting organic sales growth of as much as 3%. That's a solid number, with earnings projected to rise at least 5% based on margin improvement and cost cutting efforts, even if organic growth comes in flat for the year. Based on the impact of COVID-19 containment efforts, which have essentially led governments around the world to stop their economies, those projections are probably too positive.
To be fair, Honeywell is likely to muddle through whatever economic hit comes. It is taking steps to solidify its financial position, for example, that should give it ample financial leeway. And it has been shifting its business in recent years to emphasize the digital aspects of its operations, positioning it to better serve its customers' changing needs and operate its own business more efficiently. The question really is around how bad things will get before they start to get better.
A fair price or a bargain?
All in all, Honeywell is a well run company, and Wall Street knows it. Thus, the shares rarely trade at bargain levels. That only tends to happen when the market is in extreme turmoil, like the deep bear market during the 2007-to-2009 recession. It also looked like a great deal during the recession before that, in the early years of the new century -- the drawdown during that downturn was about 60% as well. So, based on that history, the stock isn't likely to interest value investors looking for fire-sale prices.
The interesting thing, however, is that Honeywell's 2.7% dividend yield is toward the high end of its range over the past two decades. The only times that it has been higher were during or shortly after the two recessions over that span. Using dividends as a rough guide for valuation, the stock looks at least a little attractive. Dividend-focused investors would do well to take a closer look, noting that Honeywell's business will likely eventually recover along with the economy even if there is a recession in 2020. Paying a fair price for a good company might be worth the risk of a drawdown, during which dividends can be reinvested at lower stock points anyway.
Stepping back and looking at other measures fills out this picture. Taking a top-line view of things, the company's price to sales ratio is roughly around its five-year average. Its price to earnings ratio, which uses the bottom line as a reference point, is notably lower than its five-year average. However, the average is skewed higher by a spike in 2018 related to one-time items. If you look back over the historical trends, though, the current P/E ratio of roughly 16 is below trend. Price to cash flow, pulling in another of the major financial statements, is also below the five-year average. All of these metrics suggest that Honeywell is, while perhaps not cheap, at least fairly valued. But, if financial performance in 2020 falters, these numbers may not look this way for long.
Honeywell's price to book value, meanwhile, is a bit below its longer term average. Book value, which comes from the balance sheet, tends to be a more enduring figure than revenues, earnings, and cash flow. So, even if those other valuation metrics move around a little, there's still a good reason to think that Honeywell is reasonably priced today based on its recent price to book value ratio. For long-term investors with an income bent, that's not such a bad deal when you're talking about buying a well run company with a historically generous yield.
Is Honeywell a buy?
Investing isn't easy -- it requires making predictions regarding an always uncertain future. Today the outlook is particularly cloudy because of COVID-19.
Honeywell probably won't interest investors that only want to buy when stocks are dirt cheap. However, long-term investors looking for fair prices on great companies -- and willing to hold through tough times -- might see today's valuation for Honeywell as a fair entry point. Not great, but reasonable for a well run company. Getting in so early may not be so bad in the long run.