Investing in Honeywell Will Take Some Patience

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Honeywell (HON)  shares are trading lower after earnings. The results? Not so bad. Is this a bargain in the offing? Or perhaps, the start of what might end up being a better opportunity. Let’s discuss. To be honest, there is a bit of mixed feeling to these results. For the firm’s fourth quarter, HON reported adjusted EPS of $2.07, which was earnings growth of one penny from a year ago, and beat the street by seven cents. Now, this adjusted number excludes pension mark to market, and non-cash charges associated with a reduction in value of reimbursement receivables due from Garrett Motion Inc. Omit the adjustments, and by GAAP standards, the firm posts EPS of $1.91, which missed expectations by nearly a dime. Revenues decreased 6.3% year over year to $8.9 billion, but did beat consensus by more than half a billion clams. That’s a positive.

Breaking It All Down

There is no doubt in my mind that Honeywell is a very solid, well run industrial type conglomerate. I remain long, and I remain a fan. There is no doubt that Honeywell runs a quality balance sheet. There is no overreliance upon goodwill. Almost every line is close to being in line to where it was a year ago, with two exceptions. On the asset side, cash and cash equivalents popped, while on the liabilities side, there was an almost equal increase in long-term debt, which does make sense in this environment. Fourth quarter free cash flow amounted to $2.5 billion, which means that your $3.72 in annual dividend payments (yielding 1.83%) is not only safe, it could go higher (just my opinion) once the pandemic has been overcome. On that note, there is also no doubt in my mind that these results have been negatively impacted by the pandemic environment.

Taking a look at the firm’s business units, the damage from the pandemic is obvious. Aerospace, (still) the firm’s largest segment experienced a 19% y/y decrease to land at $2.978 billion for the quarter despite double digit growth in Defense & Space. This only improves once Boeing (BA) works its way through inventory, meaning it could be a while. Performance Materials & Technologies, the firm’s second largest business, generated $2.556 billion in sales for the quarter but -12% from Q4 2019.

Building Technologies almost held their own at $1.426 billion, down 4%, while there was significant strength in Safety and Productivity Solutions. The one unit that has benefitted from a global need for PPE saw sales rise 27% to $1.94 billion. For the firm, both segment and operating income margins contracted for the full year company-wide. That said, margins expanded for this unit.

The Chart

What matters right now is that the lower baseline for the period of consolidation that has been in place since the gap created in early November. Keep in mind, however, that this gap that I speak of has never been filled. What this means in plain speak is that if $197 breaks, the stock could technically trade as low as $186.

My Opinion

Put plainly, I am long HON. I intend to buy the shares in between $197 and $200. Should the shares crack $197, I pause my accumulation until the shares near $187. My target price is $225. I base this on the quality of the already mentioned balance sheet, the possibility of a dividend increase, the ongoing exposure to the PPE market, and the eventual resurrection of demand for civilian aviation. This in my opinion will also require some patience. My thought is that HON takes six to nine months to reach target.

(Honeywell and Boeing are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)