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

So keep a close eye on Honeywell’s M&A activity — if it acquires a company supplying similar technology to the U.S. government, such as Harris Corporation (NYSE:HRS), then Motorola’s profitability could be in jeopardy.

Harris sells a variety of communications technologies and other systems to both the government and private sector, including many of the same products and services that Motorola Solutions sells (e.g., portable radios). The company recently signed a number of new contracts with the U.S. government, including one with the National Institutes of Health that is potentially worth $20 billion.

Whereas Honeywell International Inc. (NYSE:HON) is an enormous company that can outspend Motorola Solutions Inc (NYSE:MSI) if it wants to attain market leadership, Harris is a little smaller than Motorola Solutions in sales, but earns similar — if not higher — margins.

In addition, the two companies earn similar returns on capital. This suggests that Motorola Solutions does not have a substantial moat when it comes to competing against other government contractors, though all government contractors benefit from barriers to entry.

As a result of its similarity in business model and in the types of contracts it bids for, Harris is the primary competitor that Motorola Solutions shareholders should keep an eye on.

Bottom Line

Motorola Solutions is not your Ben Graham-style value stock. Nothing about its price or enterprise value multiples suggest that it is cheap. However, by using its excess debt capacity to recapitalize the company, Motorola Solutions Inc (NYSE:MSI) is much cheaper than it currently appears. If it can hold off its competitors and secure more long-term contracts with the government, this stock will pay off for shareholders over the next two to three years.

The article A Good Value Despite High Multiples? originally appeared on Fool.com and is written by Ted Cooper.

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