Feeling sick? Head to the doctor! But even if you're feeling healthy, you should still go in for the occasional checkup to catch any problems that may not be readily apparent.
The same is true for investments: by all means, check on those worrisome companies in your portfolio ... but it also pays to check up on the companies that seem -- at least on the surface -- to be in good health. Even a large company with a strong brand and a massive customer base may not be as healthy as it seems (Volkswagen, anyone?).
Let's check up on three major industrial conglomerates: the largest in the world, General Electric (NYSE: GE), its closest competitor, the German Siemens (NASDAQOTH: SIEGY), and the smaller Honeywell (NYSE: HON), to see if they get a clean bill of health... or need a more thorough exam. To make sure we're catching any worrisome trends, we'll look at data from the last three fiscal years.
A profitable company is generally a healthy company. But mere profitability doesn't necessarily make a worthwhile investment. Inconsistent or lower-than-expected profits can negatively impact a company's stock. Worse, they can be signs of poor management or other problems.
Luckily, all three companies are profitable and have been for years. Better yet, the companies have all been fairly consistent in growing their net earnings over the past three years:
|Company||FY2014 Net Earnings||FY2013 Net Earnings||FY2012 Net Earnings|
|General Electric||$15.2 billion||$13.1 billion||$13.6 billion|
|Honeywell||$3.9 billion||$2.9 billion||$2.1 billion|
|Siemens*||$6.9 billion||$6 billion||$5.6 billion|
Clearly, Honeywell is the standout company here, having nearly doubled its net earnings between 2012 and 2014. However, GE's 12% net earnings growth and Siemens' 23% over the same time period are none too shabby, either, particularly for such large companies.
All three are also spitting out gobs and gobs of cash, as shown in this chart tracking their free cash flows:
|Company||FY2014 FCF||FY2013 FCF||FY2012 FCF|
|General Electric||$14 billion||$15.1 billion||$16.2 billion|
|Honeywell||$3.9 billion||$3.4 billion||$2.6 billion|
|Siemens*||$6.6 billion||$7.5 billion||$6.4 billion|
Interestingly, each company has a slightly different free cash flow picture over the last three years. GE's has been steadily dropping, largely from divestitures of non-core assets, Honeywell's has been steadily increasing as a result of strong performance, and Siemens' jumped in 2013 and dropped back down in 2014 as a result of declining revenues, mostly due to negative currency effects against the Euro.
None of these numbers throw up any red flags for me. Even with the YOY fluctuations, all these numbers are solid.
...And spending It
Regardless of how much a company earns, if it isn't generating sufficient cash to cover its expenses, it's in trouble. And industrial manufacturing is a notoriously capital-intense business as plants and equipment require repairs and upgrades. So it's no surprise that all three companies have spent a lot of money on capital expenditures over the years.
|Company||FY2014 CapEx||FY2013 CapEx||FY2012 CapEx|
|General Electric||$13.7 billion||$13.5 billion||$15.1 billion|
|Honeywell||$1.1 billion||$947 million||$884 million|
|Siemens*||$2.3 billion||$2.5 billion||$2.8 billion|
Here again, though, everything seems fine. GE and Siemens have actually reduced capital expenditures over the last three years, while Honeywell's have only grown modestly. And as we saw above, the cash flows for each company can more than cover their capital needs with plenty of free cash left over.
Other people's money
Of course, if the money a company generates is going to its creditors instead of back into the business, it's not of much use to shareholders. Here is a chart tracking the annual debt-to-capital ratios of the three companies over the last five years:
While Honeywell's and Siemens' are reasonably comparable, GE's seems incredibly high. But this is primarily a result of the leverage taken on by the former GE Capital, and is decreasing as GE continues to divest itself of those businesses
However, looking at their current EBIT/Interest expense ratios, none of the companies appear to be having any problems paying on their debt. Honeywell and Siemens have EBIT/Interest expense ratios of 31.8 and 9.6, respectively, while even GE has a ratio of 2, which should increase as the unwinding of GE Capital continues.
The Foolish bottom line
After this checkup, it appears all three companies a clean bill of health, with increasing earnings, plenty of cash to cover their capital needs, and manageable levels of debt.
The biggest surprise to me was how well Honeywell performs against its two larger competitors by these metrics. Naturally, one would expect a smaller company to see higher levels of growth, but the difference here is quite striking. Honeywell, though, is anything but a hidden bargain. The market has definitely taken note of the company's strengths and has bid up the stock accordingly:
The other notable thing about this chart is how poorly Siemens has performed by comparison, despite being a healthy company. I'm speculating here, but continuing worries over the Eurozone are at least partially to blame here. Whatever the reason, Siemens' stock seems as though it may be underpriced at the moment, with a P/E ratio of just 9.4 compared to GE's 16.8 and Honeywell's 18.5..
Either way, each company looks to be worth keeping on your radar.