Motorola Solutions Inc (MSI), Honeywell International Inc. (HON): A Good Value Despite High Multiples?

Page 1 of 2

Hedge funds have been buying shares of Motorola Solutions Inc (NYSE:MSI), despite it trading at high multiples of traditional value measures. The stock currently trades at 20x earnings, 21x free cash flow, 9.5x EV/EBITDA, and 10x tangible book.

However, traditional value measures are only a starting point for finding real value in the market. In fact, most good investment opportunities are not obvious upon first glance. Therefore, it is worth taking a closer look to discover why hedge funds like Motorola Solutions so much.

Government Work

Motorola Solutions Inc (MSI)

Motorola Solutions Inc (NYSE:MSI) has two divisions, but the most important one is its government segment. The company is the overwhelming leader in supplying the government with public safety radios, software, and other technologies. And its advantage is only going to grow as it moves further out on the experience curve.

One of the most exciting things about the company is that it has excess debt capacity — and it is using that excess capacity to borrow money to repurchase shares. Borrowing money to buy back stock is a terrific way to unlock shareholder value as long as debt remains at a sustainable level. The company currently has less than 2x debt to EBITDA — a level that is not only sustainable, but extremely low for a company with Motorola Solutions’ stability.

In addition to stability, the company earns high margins. It posted a pre-tax margin of nearly 14% in its last fiscal year and is expected to continue earning a similar margin in the future.

The only concern with Motorola Solutions Inc (NYSE:MSI) is that it has cut back significantly on research and development, which could hurt results down the line. It is also subject to the whims of government budgets, which could be axed at any time.

Partial Competitors

Motorola Solutions stands on its own, particularly in government work. But a few companies can give it headaches at times.

For instance, Honeywell International Inc. (NYSE:HON) is a much more diversified contractor than Motorola Solutions. Its recent major contract awards in aviation and its market leadership in aerospace control and safety systems will help it produce ample free cash flow for research and development in the coming years.

In addition, Honeywell’s business is even more stable than Motorola Solutions’. Over the last decade, it has had extremely little variance in its free cash flow margin, suggesting a predictable business with stable market share.

As a result of having high margins and plenty of capital, Honeywell International Inc. (NYSE:HON) has the firepower to undercut and outspend Motorola Solutions should it choose to aggressively pursue Motorola Solutions Inc (NYSE:MSI)’s market share. One way Honeywell could do this is by making key acquisitions. In fact, the company has accumulated so much goodwill from its acquisitions that intangibles are its single largest asset. Instead of buying back stock or paying a higher dividend, Honeywell often uses free cash flow to enter new markets or beef up its status in existing ones.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!