Doing its best to help put the blue chips back on track after Lockheed Martin's (NYSE:LMT) fumble yesterday, defense contractor and industrial heavyweight Honeywell International (NYSE:HON) reported its fourth-quarter and full-year earnings this morning. To its credit, Honeywell gave us very little to complain about:

  • 2013 sales grew 4% to $39.1 billion, one of the best performances seen among the industrial large caps so far.
  • Operating profit margin on this revenue expanded by 60 basis points to 14.2%.
  • That resulted in profit leaping even higher, up 33% year over year to $4.92 per share.
  • Free cash flow -- defined as cash from operations minus capital expenditures¬†-- was an impressive $3.4 billion, up 29% from last year's tally.

Perhaps as important as Honeywell's overall performance is the fact that the company seems to have momentum on its side. Revenue, earnings, and free cash flow growth all accelerated in the final quarter of the year. The near-tripling of fourth-quarter profit to $1.19 per share was especially gratifying.

What it means to you
Analysts who follow Honeywell expect this earnings momentum to continue -- probably not at the 33% growth rate we saw in 2013, but at least at a respectable 10% pace. Problem is, this doesn't lead us to a particularly attractive valuation on Honeywell stock. Priced today at nearly 18 times earnings, and more than 20 times free cash flow, it's hard to see how 10% growth could justify the prices Mr. Market is charging for Honeywell stock.

Granted, part of the reason for Honeywell's weak free cash flow performance has been the company's increasing spending on capital investment. CEO Dave Cote calls these investments "seed planting" and says they are helping Honeywell with "innovating new products and technologies, and expanding geographically." So far, however, the payoff from these investments has been meager.

Over the past five years, Honeywell's annual capital spending program has increased by 55%, from $609 million in 2009 to $947 million in 2013. Cash generated from operations, in contrast, has grown only 10%, to $4.3 billion.

When you consider further that Honeywell has spent $4.3 billion in cash on acquisitions during this time period, but that the company is only generating $389 million more in annual operating cash flow -- from new and old businesses combined -- than it produced in 2009, it's hard to argue that these investments are paying off for Honeywell -- or for its shareholders.