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Honeywell International Inc. (HON): Are There Blue Skies Ahead For This Aerospace Giant?

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Honeywell International Inc. (NYSE:HON) is the world’s largest manufacturer of avionics and small jet engines, and also produces a variety of other products. Although the company’s revenues took a hit as a result of the recession, things are certainly back on track now. In fact, 2012’s sales were higher than they ever were before, and 2013 is projected to be even higher. With shares trading just under their all-time highs, should investors take their profits and head for the exits, or is there another leg up for Honeywell?

Honeywell as an investment…

Honeywell International Inc. (NYSE:HON) operates its business through four segments, which make up the headings below. As an investment, Honeywell still looks very fairly valued, despite the recent gains. Shares trade for 15.8 times this year’s expected earnings, which are expected to grow at a very nice rate over the next few years due to the rising demand for new aircraft and the growing trend towards energy efficiency. Honeywell is projected to earn $5.52 and $6.06 per share in 2014 and 2015, respectively, which corresponds to annual earnings growth of 11.5% and 9.8%, which more than justify the P/E.

Also worth mentioning is Honeywell International Inc. (NYSE:HON)’s very strong balance sheet, which the company has strengthened even further in recent years. The company has greatly improved its cash/debt ratio, a great sign of financial health, and can be seen in the chart below. Notice how much closer together the two lines are now than they have been in the past.

Before jumping in, let’s take a quick look at what Honeywell does, who they compete with, and if our investment dollars would be put to better use with one of them.

Aerospace

The aerospace segment is perhaps Honeywell International Inc. (NYSE:HON)’s most well-known, producing various products for both commercial and military aircraft, and accounting for 32% of the company’s sales. Examples include cockpit controls, avionics, safety systems, electric power systems, and brakes, just to name a few. The company also manufactures jet engines for smaller regional and business jets. Major competitors to this aspect of Honeywell’s business include United Technologies Corporation (NYSE:UTX), whose Pratt & Whitney brand of jet engines and accessories are meant for the same applications as Honeywell’s.

Honeywell International Inc. (NYSE:HON)In addition to their jet engines, United Technologies Corporation (NYSE:UTX) produces helicopters under the Sikorsky name, elevators, and Carrier air conditioners, to name a few of their products. Shares of the company trade for a cheaper 15.1 times 2013’s earnings as well as pay a slightly better dividend yield (2.28% vs. 2.1%) than Honeywell International Inc. (NYSE:HON). Earnings are actually projected to grow slightly faster as well, at 13.6% and 12.1% over the next two years. It is worth noting that United Tech has a much more leveraged balance sheet, with over $21.5 billion in debt and just $4.8 billion in cash.

Automation and Controls

Honeywell International Inc. (NYSE:HON)’s largest segment at 42% of the company’s sales, automation and control’s products include a variety of environmental and combustion controls, sensory, security products, and building solutions products. This segment produces an extremely wide range of products, and is the clear leader in the market; hence there are no “direct” competitors.

Performance Materials

This segment produces specialty chemicals and fibers for a variety of applications and makes up 16% of Honeywell International Inc. (NYSE:HON)’s revenues. These products include resins, fluorocarbons, research chemicals, advanced fibers, health care and packaging films, absorbents, and more. There are no shortage of competitors in this space, and my favorite investment in the sector is The Dow Chemical Company (NYSE:DOW), so let’s see how the two compare as investments.

Dow is the largest U.S. chemical company, with sales of about $60 billion annually. The company produces an enormous variety of chemical products for almost every industry that has a use for chemicals. As an investment, Dow is a tremendous bargain right now, trading for just 13.9 times this year’s earnings, with a phenomenal 21% forward earnings growth rate projected for the next three years. The downside is that The Dow Chemical Company (NYSE:DOW) is 100% dependent on the volatile and cyclical chemical industry, but the fact that it is the industry leader gives it some pricing power and other advantages.

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