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Honeywell’s Valuation Premium over Its Peers

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Honeywell’s forward PE multiple

Honeywell’s (HON) fiscal 2018 earnings guidance pushed its one-year forward PE (price-to-earnings) multiple from 19.80x to 20.10x as of December 13, 2017. Honeywell’s peer United Technologies (UTX) has a one-year forward PE multiple of 18.20x.

The forward PE multiple takes the forecasted future earnings into account for valuation purposes. It helps investors compare two or more companies operating in the same industry based on its future earnings. Investors are able to determine which company is overvalued and which company is undervalued.

Honeywell commands a premium over United Technologies

Honeywell’s earnings in the past three quarters have been beating analysts’ estimates. Honeywell’s guidance indicates a strong end to fiscal 2017. Its EPS (earnings per share) is expected to be at the higher end of the guidance of $7.10. Looking forward to fiscal 2018, the EPS is expected to be $7.55–$7.80, which is ~6.3% growth to 9.9% compared to its EPS in fiscal 2017. The growth is driven by the expected organic sales growth of 2%–4%. Other factors like share buybacks, acquisitions, and expansions could fuel the growth. The intended spin-offs are expected to add value to investors.

On the other hand, United Technologies’ fiscal 2018 EPS is projected to grow 3.40%, which is well below Honeywell’s projected EPS growth. As a result, Honeywell’s valuations command a premium over UTX.

Investors can hold Honeywell indirectly by investing in the Vanguard Industrials ETF (VIS), which has invested 3.8% of its portfolio in Honeywell. The fund’s other holdings include General Electric (GE) and 3M (MMM) with weights of 5.30% and 4.80%, respectively, as of December 13, 2017.

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