How Is Honeywell Valued Compared to Peers?



Honeywell’s forward PE

In the previous part of this series, we looked at analyst recommendations for Honeywell (HON). In this section, we’ll look at Honeywell’s valuation compared with peers. Forward price-to-earnings (or PE) is a relative valuation method that considers the company’s future earnings. As of January 6, 2017, HON was trading at a one-year forward PE multiple of 16.5x as compared to its peer United Technologies (UTX), which is trading at a one-year forward PE multiple of 17.2x.

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The forward price-to-earnings ratio tells how much investors are paying for the stock per dollar of expected earnings in the next 12 months. This valuation is one of the most popular valuation tools, as it helps investors to compare companies that operate in the same industry and see which stocks are overvalued or undervalued.

Is Honeywell undervalued?

At present, Honeywell is trading at a discount to peer United Technologies. The major concern for HON is its revenue growth. Since 2015, HON has been struggling to post revenue growth. In its guidance for 2017, Honeywell said that it expects organic revenue growth of 1%–3%. However, on a reporting basis, HON expects its revenue to be negatively impacted in the range of 1%–2% due to divestitures.

On the other hand, UTX has provided the revenue guidance for fiscal 2017 to be in the range of $57.5 billion to $59 billion, indicating the reported revenue could grow in the range of 2%–4%.

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Apart from revenues, Honeywell has a better net income margin of ~12.7%, while the UTX net income margin is ~9.1%. Plus, in 2017, HON expects its segment margin to expand by 70–110 basis points due to restructuring benefits. Also, HON’s earnings per share rose 13% in 2015, and analysts expect EPS to rise 7% in 2016. For 2017, HON has provided EPS guidance to be in the range of $6.85–$7.10, implying a growth rate of 5.9%–9.7%.

Investors can indirectly hold Honeywell by investing in the Industrial Select Sector SPDR Fund (XLI), which has invested 4.6% of its portfolio in Honeywell as of January 9, 2017. The top holdings of the fund include General Electric (GE) and 3M (MMM), which have weights of 10% and 5.3%, respectively.


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