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
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
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.
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
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%.
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.