Although conglomerates do not always get the benefit of the doubt, Honeywell (NYSE:HON) is showing some of the benefits of managing a broad base of unrelated businesses. Not all of Honeywell's businesses are running hot right now, but the company has a good spread of businesses exposed to the early, middle and late phases of the economic cycle. Honeywell does not have the best growth top-line growth outlook on the Street, nor the best free cash flow margin, but investors should not be quick to ignore this name.

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The Quarter That Was
Analysts have been in a rush lately to raise their estimates on Honeywell, but the company nevertheless surpassed expectations for the fourth quarter. Revenue jumped 12% in the quarter, with organic growth clocking in at an impressive 10% clip. Within the company's segments, Honeywell's largest business (automation/control) was one of the strongest as revenue grew 15% to over $3.9 billion. Transportation was even stronger at 18% growth, while specialty materials grew 12% and aerospace brought up the rear with 6% growth.

The profit side of the income statement was a little harder to evaluate. Gross margin was quite a bit better than last year, expanding almost 340 basis points. Unfortunately, both gross margin and operating margin are impacted by various costs like "repositioning." Consequently, segment operating profit rose just 4% for the quarter, but the company's operating leverage is not as weak as that suggests. (For more, see Honeywell's 2011 Outlook.)

The Look Ahead
Honeywell has been maintaining pretty solid free cash flow production even despite a relatively mediocre environment in the commercial aerospace industry, particular the segment of the marketing targeting larger jets (where Honeywell is relatively stronger). Eventually Boeing (NYSE:BA) and EADS will figure it out, though, and companies like Honeywell, United Technologies (NYSE:UTX), Rolls Royce and General Electric (NYSE:GE) can go back to beating up on each other with the backdrop of a healthier overall environment. Given that aerospace produces the highest operating margins for the company, that is clearly something that Honeywell needs to happen.

In the meantime, the company is likely to continue seeing strength in its automation and control operations. Honeywell is often only mentioned in the financial media as an afterthought to ABB (NYSE:ABB), Emerson (NYSE:EMR) or Siemens (NYSE:SI) when it comes to process automation, but this continues to be a solid area of growth - particularly in developing markets. Better still, Honeywell has a foothold in the transition to smarter, more efficient building systems and this is likely to be a multi-year growth opportunity as companies like Honeywell and Johnson Controls (NYSE:JCI) have made building efficiency practical and pragmatic enough that companies can "go green" without incurring rivers of red ink.

Apart from that, Honeywell management continues to demonstrate that they are not standing pat with the business. Along with earnings, the company announced an agreement to sell its Consumer Products Group to a private group for nearly $1 billion in cash. Consequently, investors should not just assume that Honeywell will play this hand forever, though it seems unlikely that management would want to get into an entirely new operating area. (For related reading, check out 3 Best Dow Jones Industrials Of 2010.)

The Bottom Line
The last few years have seen a meaningful bump up in Honeywell's free cash flow margins. If these levels are sustainable, Honeywell is an interesting long-term hold. If management can find even more ways to improve operations, though, and actually lift these margins a bit further, the stock gets very interesting based on a 10-year discounted cash flow analysis. If Honeywell could boost its average free cash flow margin by just 0.5% (50 basis points) over the next five years, that alone is worth an extra 5% to the stock.

Honeywell has work to do; the company's return on capital and assets could and should be better. If management is up to the challenge, this is a name that could get very interesting even though the stock is already near a 52-week high.

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