Today we have a moderately speculative idea.: take shares in industrial conglomerate Honeywell International (NASDAQ: SHE), to capitalize on the growth of his business.
Growth potential and validity: 14,5% behind 14 months, excluding dividends and taking into account the separation of its divisions by the company into separate issuers; 27% behind 2,5 year, excluding dividends and taking into account the separation of its divisions by the company into separate issuers; 10% per year for 15 years, taking into account dividends and the allocation by the company of its divisions to individual issuers.
Why stocks can go up: because the company's products will be in great demand.
How do we act: we take shares now by 183,29 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
HON is engaged in the provision of services and the production of goods in the field of industry. According to the company's annual report, its business is divided into the following segments.
Aerospace — 32,15%. About 40% segment revenue comes from the defense sector, nearly 60% – commercial aviation, 38% entire segment revenue comes from parts and services for commercial aircraft. Segment operating margin — 27,67% from its proceeds.
Construction technologies — 16,15%. These are sensors, switches and other things for real estate. Segment operating margin — 22,35% from its proceeds.
Materials and technologies for strength — 29,19%. As a matter of fact, This is a job in the chemical industry.. By application, segment revenue is divided as follows::
- Oil and gas industry - 30%.
- Petrochemistry — 11%.
- Housing and public utilities and construction - 24%.
- Industrial production - 16%.
- Chemistry and Pharmacy - 8%.
- Other - 11%.
Segment operating margin — 21,17% from its proceeds.
Safety and Productivity — 22,51%. These are solutions for handling hazardous materials and protecting. By application, segment revenue is divided as follows::
- Warehouses and logistics centers — 31%.
- Industrial production - 22%.
- Retail — 16%.
- Healthcare —14%.
- Oil and gas industry - 7%.
- Other - 10%.
Segment operating margin — 13,16% from its proceeds.
As a matter of fact, the company's revenue is divided into goods and services:
- Goods - 74,56%. Segment gross margin — 28,47% from its proceeds.
- Services - 25,47%. Segment gross margin — 42,3% from its proceeds.
Revenue by country and region:
- USA - 60,07%.
- Europe - 19,77%.
- unnamed regions - 20,16%.
Arguments in favor of the company
Fell down. The company's shares have fallen significantly over the past year.: from 233 to 183,29 $. One of the reasons for the fall was the decrease in the profitability of the company's business due to problems with the supply and cost of raw materials.: analysts were waiting for the forecast for 2022 in the area 9 $ per share, and the company announced, what will be around 8,55 $. I do not think, what is the decline in forecasts entails problems: it's still more 7,91 $ in 2021, and the sum of the company's virtues should draw investors back into those shares.
Something about some kind of rise. US industrial boom, and in the short term it favors the company's business. But even in the long term, the company's business looks diversified enough to, to make it through the not-so-good times.
Even the company's aviation business, hard hit by the pandemic, good prospects now, since it is largely focused on servicing existing aircraft: aircraft were idle for a significant part of 2020 and 2021, what makes servicing returned aircraft a smart investment for airlines.
Dividends. The company pays 3,92 $ per share per year, what gives 2,13% per annum. That's not a lot, but still much more than average 1,45% per annum by S&P 500. Given the relative stability of HON's business, this can attract dividend investors to its shares.
Like it's better. The company has mastered the art of bragging about growth numbers taken out of context., which often mean nothing. And I must say, HON “under the right lighting” looks noticeably cooler than comparable companies: return on assets in 1,5 times higher, return on equity in 1,4 times higher, return on invested capital in 1,7 times higher, margin growth by 3,1% above, the level of free cash flow margin in 1,7 times higher.
All this boasting increases the likelihood that, that a bored bank or investment fund manager decides to add HON to his fund or bank's asset portfolio because, that "not, well, what about something, out normal company, and divas pays". This is important because, that HON is a huge company with a capitalization of $125.64 billion and, hence, only the actions of institutional investors will be tangible here.
Need more ESG. The company also boasts a lot about its achievements in various ESG metrics.. In Sustainalytics, she has a very high ESG rating in her subgroup.: among industrial conglomerates, it is in tenth place out of 111. This can be considered a big plus., since the ESG lobby is now very influential and, means, one can humbly hope, what it will support as HON quotes, and her accounting.
The company has come this far, that even singled out all its "green" divisions - green fuel for aviation, advanced plastic recycling, carbon capture, electric batteries, green hydrogen - in a separate segment. In total, such initiatives give the company 200 million in revenue per year., this 0,58% of the total volume.
Comparison of company ESG metrics
| Honeywell | Average competitor | |
|---|---|---|
| Percentage of women on the board of directors | 36% | 27% |
| Percentage of non-white board members | 45% | 18% |
| Percentage of women among company employees worldwide | 29,5% | 23% |
| Percentage of non-white workers at the company's US facilities | 33,8% | 27,5% |
| Number of accidents per 100 employees | 0,25 | 1,72 |
Adventure Time. The company's shares have been marking time for the past year and a half, despite the fact that her business is objectively good. It seems to me, it can cause shareholder revolt, that will require HON management to act, aimed at increasing the benefits for shareholders. In theory, this could be an increase in dividends - but I doubt it: the company spends almost 50% profit on it.
Much more likely is the division of this huge company into different parts.: HON may well list some of its divisions as separate issuers. It will benefit all shareholders, because the shares of the new issuer can grow more cheerfully than a single HON. The likelihood of such a separation greatly increases over time, even without an attack from an activist investor.: among industrial conglomerates, the fashion is now spreading to separate.
It seems to me, that the potential for the listing of the quantum computing division of HON is great: investors are very fond of everything bright and shiny, and the quotes of such an issuer on the market can pump up to the stratosphere, without looking back at the foundation.
What can get in the way
Growth will not only be in a good way. The rise in the cost of raw materials and transportation is now the scourge of all manufacturers in developed countries. Add to that the Ukrainian crisis, which will make it harder for HON to do business in Europe, - and get ready for it, that the company's supply problems will continue for at least the next six months.
Not cheap. Company P / E — 23 and P / S — 3,68. That's not a lot, but not a little - the company does not look criminally undervalued. This limits the stock's upside potential, because there is no rapid growth here and is not expected.
Accounting. The company has over 46 billion debts, of which 19.508 billion must be repaid during the year. The company has a lot of money: 10,959 billion in accounts and 6.83 billion debts of counterparties. And she can get a loan on acceptable terms without any problems., but still the amount of debt is too big. This could scare off investors ahead of rate hikes.. HON dividends could cut as part of investment program, Considering, what are her debts.
What's the bottom line?
We take shares now by 183,29 $, and then we have the following options:
- wait for growth until 210 $. Think, we will reach this level in the next 14 Months;
- wait for growth until 233 $. Better get ready to wait here 2,5 of the year;
- keep shares next 15 years, while the company is divided into parts - to the greatest benefit of shareholders.
As soon as SPb-Exchange returns to normal operation, should start following the news on the HON website about the cancellation or reduction of dividends, in order to throw shares before, how the American market will react to this news and stocks will fall. Now it can't be done: SPb-Exchange starts its work much later than usual, reducing our time advantage to zero.
