More and more it's looking like 2013 is going to be a challenging year for a variety of businesses. While it's convenient (and not entirely inaccurate) to lay some of this at the feet of the "fiscal cliff," it also looks like the strong industrial rally in North America is petering out, while Europe and China aren't looking strong enough to take up the slack. With all of that in mind, Honeywell's (NYSE:HON) guidance update was not all that surprising. Though this remains a generally underrated conglomerate, the shares don't look like a tremendous bargain today.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Sluggish Growth on the Way for 2013
It may well prove to be the case that management at Honeywell is preparing investors for the worst, but it's not looking like 2013 is going to be a banner year. Management guided for organic revenue growth of 1 to 3%, with the midpoint coming in about $150 million shy of the prior sell-side average. While the performance materials business looks to be strong again (good news for the likes of DuPont (NYSE:DD) and BASF (OTC:BASFY)), aerospace and transportation are looking to be pretty soft in terms of revenue growth.

On the transport side, Honeywell is not looking for a big rebound in automobile production, though new product introductions should help a bit. Honeywell's guidance isn't exactly great news for companies like BorgWarner (NYSE:BWA), though it's also not a big surprise. With aerospace and defense, it does look like a mixed bag. Although about 85% of Honeywell's defense business seems safe from sequestration, it's still going to be a difficult year in defense. On the commercial side, new commercial orders should do alright, but it seems like the flight hours data is pointing to tougher conditions for the aftermarket side of the business. If those new planes continue to roll, that should be good for the likes of General Electric (NYSE:GE), but I'll be curious to see how the defense cuts and aftermarket weakness work out for GE and other aerospace players like United Technologies (NYSE:UTX).

SEE: Can Earnings Guidance Accurately Predict The Future?

Intermec Looks Like a Savvy Little Deal
With the update, Honeywell also announced that it was acquiring Intermec (NYSE:IN) for $600 million. Intermec is in the business of mobile computing (hand-held computers), RFID and supply-chain management, with leading positions in automatic ID and data capture (selling products like hand-held scanners and bar code printers). Intermec competes with companies like Motorola Solutions (NYSE:MSI), Zebra (Nasdaq:ZBRA) and Honeywell itself. Adding Intermec will pretty much double the scanning/mobility part of Honeywell's Automation/Control business, and should bring some solid incremental margins in a year or two.

At $10 a share, Honeywell offered a roughly 25% premium to Intermec's prior close. Honeywell is paying a 10 times multiple on a trailing adjusted EBTIDA, though management believes the multiple would be more on the order of 5 times on a run-rate basis including synergies. Intermec looks like an interesting deal for Honeywell. Although the company has not had a very impressive (or consistent) record of revenue, margin or free cash flow (FCF) growth, the technologies and products seem to fit in well with Honeywell's business, and I believe Honeywell can quite likely derive more value from these assets than Intermec was able to on its own. More to the point, this is exactly the sort of modestly-sized, accretive deal that I want to see from Honeywell - it doesn't change anything overnight, but it should boost revenue, margins and FCF relatively soon and offer a solid internal rate of return.

The Bottom Line
Although I think Honeywell is often overlooked as a quality conglomerate, that's not to say that the stock is all that cheap today. It's probably going to take a couple of years for Honeywell to get back to double-digit FCF margins, and I'm a little concerned that there could be more risk to the performance materials business (from higher natural gas prices) and transportation business (ongoing weakness in European vehicle production). Nevertheless, I think fair value on Honeywell shares ranges from the high $60s to the low $70s today - enough to make this is a worthwhile hold, but not an especially compelling buy.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center