Earnings season is in full flow and the industrial heavyweights are all giving reports. General Electric Company (GE 3.94%), Danaher (DHR +0.17%) and Honeywell International (HON +0.54%) have all recently released their earnings. For want of a better description, these companies are usually lumped together and called industrial conglomerates, but Foolish investors will want to know what makes one more attractive than the other. In other words, why buy a stock like Honeywell International, rather than General Electric or Danaher?
Honeywell International raises guidance, sort of
With a diversified industrial with a market cap of $73 billion, it's going to take a pretty seismic change of fortunes within any one industry in order to significantly adjust earnings guidance. This was certainly the case with Honeywell's latest results. Despite, full-year sales guidance being increased by $100 million to $3.9 billion for its transportation unit, the only change to EPS guidance was to see the bottom end raised by $0.05, resulting in a revised full-year guidance of $5.40-$5.55.
Transportation had a "very strong quarter" with sales up 7% in constant currency. The improvement was partly due to a pick-up in European vehicle sales (a region where Honeywell's turbochargers have strong penetration), and since Alcoa upgraded its guidance for the European automotive sector, it's reasonable to expect Honeywell to have a good year with selling turbochargers into the region.
Aerospace matters for Honeywell International
However, a quick look at Honeywell's segmental profits for 2013 suggests that its main upside potential lies from an improvement in either its aerospace segment, or even, its automation and control solutions, or ACS, segment. For reference, the acronym for the performance materials and technologies segment is PMT.
Source: Company presentations
The aerospace sector has seen mixed fortunes lately, with commercial aerospace being very strong, but defense related hardware is being challenged by cutbacks to military programs. Honeywell generated more than 40% of its 2013 aerospace revenue from the defense and space sub-segment, so it's no surprise to see its overall aerospace sales down 2% in the first quarter. The company's management argued that aerospace sales would have been up 3% -- excluding the 8% decline in defense and space -- but this sort of commentary is not going to change the EPS forecast! Moreover, the aerospace segment is still forecast to grow at a paltry 1% rate in 2014.
All told, Honeywell continues to forecast overall full-year sales growth of 4%, but margins are forecast to grow for all its segments, resulting in EPS growth of 9%-12%.
| Segment | Sales Growth | Margin Growth (basis points) |
| Aerospace | 1% | 20 |
| ACS | 7% | 15 |
| PMT | 4% | 18 |
| Transportation | 4% | 15 |
| Total | 4% | 16.8 |
Source: Honeywell presentations
Expensive versus peers like General Electric or Danaher
While the forecast for 4% growth in 2014 is comparable to other companies in the sector, it's half what General Electric Company managed to grow its industrial revenue at in its last quarter. The reason is that General Electric Company's specific industrial end market exposures are looking favorable for 2014. Moreover, a stock like Danaher has good exposure to some relatively defensive medical markets. Therefore, Honeywell International looks relatively expensive compared to other industrial conglomerates on a price to free-cash flow basis.
HON Price to Free Cash Flow (Annual) data by YCharts
Where next for Honeywell International?
In order to be a good value, Honeywell needs some upside surprise in 2014. It's hard to see that coming from aerospace, because defense budget remain constrained and the strength in commercial aerospace is well known to the market. A cyclical pick-up in its automation and control solutions segment would help, but there are likely to be other stocks with better exposure to this theme. In conclusion,stocks like General Electric and Danaher probably offer more specific exposure to strong end markets in 2014, and Honeywell's valuation isn't particularly compelling right now.
