Tickers in this Article: HON, EMR, GE, ABB, EMR
Many investors are so obsessed with finding bargains that they sometimes overlook excellent companies trading at reasonable valuations. This can be a long-term mistake, as it is often better to own the more expensive stocks of superior companies. That seems like a relevant point with Honeywell (NYSE:HON) today. While these shares are not significantly undervalued today, the quality of the company's execution and the prospects for better margins (and growth) argue for a long-term position.

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Honeywell Comes Through In A Tough Market
On the basis of what the market has seen so far from industrial conglomerates like General Electric (NYSE:GE) and Dover (NYSE:DOV), it seems safe to say that analysts and investors were too bullish about earnings to start the year. When it comes to Honeywell, though, it looks like business is on a better track – revenue was a bit light, but strong margins lifted results for the quarter.

Revenue came in basically flat for the first quarter. Aerospace was down 1% on an organic basis, automation and control solutions was flat, performance materials was down 2%, and transportation was down 4% for the quarter.

Margins were surprisingly strong, even with iffy volume. Gross margin improved by more than a point. Operating income improved 11%, with operating margin up about 140bp on an adjusted basis. Segment profits were also strong, growing 7% from the year ago period. All told, Honeywell beat expectations by about four cents on an operating basis.

SEE: Understanding The Income Statement

Major Markets Soft, But No Disasters
Although much has been made of the big commercial production schedules at Boeing (NYSE:BA) and Airbus, the reality is that the commercial aviation market is still growing fairly slowly. Commercial original equipment sales were down 1%, with aftermarket sales down 3% on sluggish flight time trends. GE had a stronger quarter in aviation this quarter (up 4%), and I would think that was a byproduct both of business mix (Honeywell has more business jet/smaller aircraft exposure) and stronger year-ago results for Honeywell.

As far as the automation and control business is concerned, we'll have to see what rivals like ABB (NYSE:ABB), Emerson (NYSE:EMR), and Siemens (NYSE:SI) have to say. By and large, expectations in this sector have been for minimal revenue growth in the first half of 2013, so Honeywell's results seem consistent with that outlook. Likewise, the outlook for building control products from Emerson and Johnson Controls (NYSE:JCI) is not particularly strong, so it doesn't seem like Honeywell is underperforming the market.

Last and not least, I was a little surprised to see that Honeywell's transport results were as good as they were. European light vehicle production has fallen off significantly, but Honeywell's turbo business seems to be offsetting this. That could bode well for BorgWarner (NYSE:BWA), which also reports later this week.

The Bottom Line
Honeywell has done pretty well for investors already over the past year. While stocks like GE and United Technologies (NYSE:UTX) have generated gains in the mid-teens over the past year and the likes of Emerson and Johnson Controls have produced single-digit returns, Honeywell stock is up about 25%. Some of this can be attributed to the progress management has made with operational execution, but some is likely also due to the company's focus on higher-growth opportunities and geographies.

I'd be careful in assuming that Honeywell can't do any better. Although I do worry about so-called “peak margins” across the industrial sector, I believe Honeywell management has laid out a good case for further incremental improvements. To that end, I believe management can deliver better than 4% long-term revenue growth, while generating nearly double-digit free cash flow growth with free cash flow margins in the very low double digits.

SEE: 5 Must-Have Metrics For Value Investors

If Honeywell can in fact deliver that sort of growth, a price in the mid-$70s is entirely reasonable for these shares. That's in line with today's price for the shares, but that doesn't mean that the year-to-year performance will be bad – it just means that there won't be much “extra” performance. While there are some cheaper industrial stocks that investors could consider today, buying and owning Honeywell seems like a solid plan unless you expect a broad downturn in the global economy and/or the stock market.

At the time of writing, Stephen D. Simpson owned shares of ABB.

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