What a difference a month or so makes. With investors happy to see Congress play kick the can with the fiscal cliff, industrial stocks have caught a second wind and done quite well over the last month. While Honeywell (NYSE:HON) is a quality industrial conglomerate that often seems to get overlooked, management's modest guidance for 2013 and the company's mediocre free cash flow history don't really argue for aggressively chasing these shares at this point.

SEE: Investing 101

Solid, Albeit Not Spectacular, Performance for Fourth Quarter
Honeywell reported a very respectable result for the fourth quarter of 2012. Management stayed true to form, however, in acknowledging some signs of end-market improvement, but maintaining guidance that on the whole looks fairly conservative.

Revenue rose 1% as reported and 1% on an organic basis. Automation and control systems (ACS) was the performance-leading division, with organic revenue growth of 3%. Aviation was a little softer than expected, with organic revenue down 1%. Performance materials grew 8% on an organic basis, while transportation dropped 11%.

Adjusted gross margin was basically flat with the prior year, while operating income rose about 9%. Segment-level profits rose a little more than 5%, with ACS logging a 10% improvement and aviation growing 5%, while performance materials and technologies (PMT) fell 6% and transportation dropped 20%. The good news, in brief, was that Honeywell saw the best performance from the segments that generally count the most.

SEE: 5 Must-Have Metrics For Value Investors

The Comps Get Interesting
Comparing Honeywell to some of its leading competitors produces some interesting data and deviations. While General Electric (NYSE:GE) saw good growth in its aviation business, Honeywell is far more exposed to defense (which fell 6%) and aftermarket parts, and that very definitely kept a lid on performance.

Honeywell's performance in ACS was also interesting. Honeywell definitely outperformed rivals like United Technologies (NYSE:UTX) and Johnson Controls (NYSE:JCI), helped at least in part by its exposure to security and environmental. Process solutions was soft, but still better than recent results from Parker Hannifin (NYSE:PH) or Siemens (NYSE:SI) might have suggested. It will be interesting, then, to see what companies such as Rockwell Automation (NYSE:ROK) and Emerson (NYSE:EMR) have to say about these markets, and likewise Tyco (NYSE:TYC) in its security business.

Transportation has also gotten very tough for Honeywell, with European light vehicle production down about 10% in the fourth quarter. Although BorgWarner (NYSE:BWA) and Honeywell's transportation business don't necessarily move in lock-step, they tend to go in the same direction at similar paces, so this doesn't suggest an especially strong quarter for BorgWarner.

Guidance Still Conservative
Honeywell tends to be a fairly conservative company, and that shows in the guidance. Management is looking for only low single-digit revenue growth this year, with good growth in PMT and decent growth in ACS pulled down by weakness in aerospace (due in large part to defense) and transportation. While it's tough to see how defense really surprises to the upside this year, it may not be as bad as was feared, while increased turbo penetration into the Chinese vehicle market could offer some upside.

Apart from that guidance, Honeywell still has ample room for improvement. The company's operating margins are not all that impressive relative to many other industrial conglomerates, and this explains a lot of the company's relative underperformance in free cash flow production. While bears could use that as a reason to avoid the shares, it also represents profit potential that could be unlocked down the road if management focuses on generating better returns.

SEE: 5 Stock Market Metrics Explained

The Bottom Line
As I have said earlier in this piece, there's a push and pull when it comes to Honeywell and its shares. The company likely could do better than it does, but how much credit do you give for potential? Likewise, while the company has some good market exposures, the overall growth profile doesn't look so impressive in the short term.

Assuming that Honeywell can generate high single-digit free cash flow growth (against mid-single digit performance over the past decade), these shares carry a fair value in the low $70s. That's not really enough to get me excited about these shares, particularly after their recent run.

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

Related Articles
  1. 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.
  2. Investing News

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

    Will Ferrari's shares move fast off the line only to sputter later?
  3. 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.
  4. 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.
  5. 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.
  6. Stock Analysis

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

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

    What Alcoa’s (AA) Breakup Means for Investors

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

    The 4 Countries That Produce the Most Chocolate

    Discover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  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 >>

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!