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.

IN PICTURES: Baby Buffett Portfolio: His 6 Best Long-Term Picks

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  2. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  3. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  4. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  5. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  6. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  7. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!