Industry: Energy and Utilities
April 9, 2008
DIVERSIFIED INDUSTRIAL FIRM
Henry Fund Research
HONEYWELL INTERNATIONAL INC. (HON) Sumit Mundhra [email protected]
Investment Recommendation
BUY
Current Price
$57.19
Target Price Range
$73.00-76.00
INVESTMENT THESIS High diversity in business segments and geography makes Honeywell capable of doing well even in the slowing US economy. High organic growth and new product introductions are driving growth for Honeywell. Automation and Control segment (ACS) alone introduced 300 new products in FY07. Because of its innovative products, Honeywell is successful in passing the higher cost of raw materials onto its customers thereby maintaining higher profit margins. We expect HON to significantly outperform the market in the next 12 months.
HIGHLIGHTS
Source: http://yahoo.finance.com
Key Stock Statistics 52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership 24-Month Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth
$46.07-62.29 $42.57 764.5 78.32% 1.007 1.92% 15.20 4.63 1.23 8.24% 25.81% 12.6%
EPS ($) Year EPS
2005 1.93
2006 2.54
2007 3.20
2008E 3.76
2009E 4.24
Even with the shrinking US automotive industry, the global penetration of turbochargers is expected to increase at a rapid pace and Honeywell has positioned itself very well to benefit from this trend. Honeywell won two-thirds of worldwide orders for turbo chargers in the last two years. Two-thirds of the contracts in the SM segment and several long term contracts in Aerospace have formula price agreements that pass the increased raw material cost to customers through an increase in price.
2010E 4.94
Because of several Initiatives including Honeywell Operating System (HOS) and Functional Transformation (FT), Honeywell has consistently achieved margin improvements in all of its business segments and will continue to do so in the future.
$74.44 $74.44 $54.75 $63.99
Honeywell is highly efficient in its cash deployment and building shareholder value. Since 2003, Honeywell achieved CAGR of 20% in EPS, increased dividends by 10% for four consecutive years, completed share repurchases of $7.8 billion and strategic acquisitions of $5.0 Billion.
All earnings represent earnings from operations and have been filtered from net nonrecurring gains.
Valuation Models Discounted Cash Flow Economic Profit Relative P/E Dividend Discount Model
Maintenance, Repair and Operations (MRO) activities in Aerospace and ACS, Turbochargers in Transportation segment and UOP in Specialty Materials (SM) segment offer tremendous growth opportunities.
Important disclosures appear on the last page of this report.
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EXECUTIVE SUMMARY
Aerospace 1
The Aerospace segment provides integrated avionics, engines, systems and services solutions to aircraft manufacturers, airlines, business and general aviation, military, space and airport operations. Aerospace segment is further divided into Air Transport and The purpose of this report is to provide an in-depth Regional, Business and General Aviation and Defense analysis of the operations and the current business and Space. Defense and Space contributed 41% environment of Honeywell International Inc. The report towards the total aerospace revenues for FY07. looks at the trends in each of the core business segments of Honeywell. We tried to compare Honeywell with its peers and looked at its current and potential core competencies moving ahead in the future. We also identified the risks associated with the company operations and within its core business segments. We also analyzed macro economic trends and their implications for Honeywell. We concluded that expected returns associated with Source: Company Data, Credit Suisse Estimates Honeywell International Inc. is an industrial conglomerate that caters to several sub-segments of industrial sector and is expected to significantly outperform the market in the near future.
investing in Honeywell International far exceeded the Table below summarizes the results of operation for the associated potential risks of investment. Based on our Aerospace segment. analysis and DCF, Economic Profit and Relative P/E valuations, we recommend a BUY on Honeywell International Inc.
COMPANY DESCRIPTION Honeywell Corporation Inc. is a diversified technology and manufacturing company that operates in four business segments – Aerospace, Automation and Control Solutions, Specialty Materials and Transportation Systems. The Graph below highlights the revenue contribution from each of the respective business segments.
Source: Annual Report FY07 Continued US defense spending and increase in the orders of commercial aircrafts in 2008 and beyond bodes well for the Aerospace segment. Moreover, MRO activities will continue to provide stable revenues for the Aerospace segment. Automation and Control Solutions (ACS) The ACS3 segment provides environmental and combustion controls, sensing controls, security and life safety products and services, and process automation and building solutions and services for homes, buildings and industrial facilities. ACS is one of the fastest growing business segments of Honeywell.
Source: Annual report FY07
ACS Revenue by Sub-Sector
Source: Company Data, Credit Suisse Estimates 1
Source: Annual Report FY07
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Annual Report FY07
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Table below summarizes the results of operation for the segment of Honeywell. Outlook for resins and ACS. chemicals business is positive owing to the strong demand from the emerging economies. SM segment offers the best growth opportunities going forward. Transportation Systems 3
The Transportation systems segment provides engine boosting systems for commercial vehicles and passenger cars. Honeywell is also a leading provider of automotive care and braking products. There are two sub sectors – Consumer Products Group (CGP) and Source: Annual Report FY07 Turbochargers. CGP includes several strong brands of Increase demand for sensors and MRO activities will car care products including FRAM filters, Prestone drive the domestic growth for ACS. Strong demand antifreeze, Autolite spark plugs, and Simoniz car from the emerging economies including China and India waxes. provide excellent growth opportunities for the ACS in Transportation Revenues by Sub-Sector 2008 and beyond. Honeywell introduced 300 new products and completed 8 new acquisitions in 2007 alone to more than offset the impact of a slowdown in the residential home construction in US. We expect ACS to continue to provide tremendous growth opportunities in the future. Specialty Materials (SM) The Specialty Materials3 segment provides high performance specialty materials including fluorine products, specialty films and additives, advanced fibers and composites, intermediates, specialty chemicals, electronic materials and chemicals, and catalysts, adsorbents, equipment and technologies for the Source: Company Data, Credit Suisse Estimates petrochemical and refining industries. Specialty Materials Revenues by Sub-Sector
Source: Annual report FY07 Increased penetration of turbocharged diesel vehicles in US, strong growth in emerging economies and Source: Company Data, Credit Suisse Estimates continued sales of turbocharged vehicles in European Table below summarizes the results of operation for the markets are primary drivers of growth in the near and long term future. SM segment.
RECENT DEVELOPMENTS In April 2008, Honeywell won a $23 Billion contract to supply next generation HTF7500-E Turbofan propulsion system for new Embraer business jets. In 2007, the AT&R segment from Aerospace division received a contract from Airbus for its A350 XWB aircrafts. The contract is worth $16 billion and will be realized over a period of 20-25 years.
Source: Annual report FY07
Acquisition of UOP in November 2005 resulted in AT&R also won a contract worth $490 million with North margin enhancements and increase in sales for the SM Western airlines for the repair and maintenance of its
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aircraft fleet. Honeywell also received $1 billion aftermarket contract from Air Tran and successfully won Auxiliary Power Units contract for 196 planes of US Airways. With the increased air traffic worldwide and continued infrastructure expansion of airports around the globe, outlook for Runway Awareness and Advisory Systems (RAAS), Enhanced Ground Proximity Warning Systems and Integrated Primary Flight Display products is positive in the near future. SM segment underwent a series of divestitures and acquisitions that resulted in increased margins and transition from commoditized based products to specialized products that cater to growing and high margin end markets. Currently, nearly two-thirds of the contracts in the SM segment have formula price agreements that pass the increased raw material cost to customers through an increase in price.
Source: Boeing The third important value driver is the overall profitability of the airline industry. If an airline is running into operating losses, new orders for commercial airplanes will be less regardless of the fleet age. International and discount carriers are doing better than the US based legacy airlines and orders in 2007 soared to 2340 from 1882 in 2006 and 2139 in 2005.
INDUSTRY TRENDS
As per the forecast by Boeing, the world air cargo traffic Aircraft demand is closely associated with the long term is expected to triple by 2026. The air cargo market is passenger air traffic growth rate. As per Avitas, a predicted to grow by 6.1 percent per year. By 2026, the market research firm, the global commercial aircraft cargo fleet will double from 1,980 to 3,980 airplanes. fleet will grow at CAGR of 4.3% until 2025.
The second value driver is the average age of the fleet. The average life of a commercial plane is around 20 years. The average fleet age in Europe was less than 10 years, about 11 years in Asia and about 12 years in US in 2006. Hence, some US carriers are due for investments in new fleet as actual age might be more than the average age of 12.
Source: Boeing The depth and breadth of ACS segment across geographies and diverse product offerings for home, commercial and industrial sectors put the ACS segment among the most promising business segments of Honeywell. MRO activities and acquisitions will drive the domestic growth while continued strong demand from China and India will boost Y-Y revenue growth. In the Transportation segment, Honeywell won 66% of worldwide orders in the last two years for turbochargers. The use of turbochargers helps reduce the CO2 emissions by 30% and increase fuel efficiency while maintaining vehicle performance. As per the S&P
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industry survey, strong growth is expected in the turbo diesel segment in US, China and India. Continued capacity expansion in the refining and petro chemical industry, strong global demand for non-ozone depleting HFC products and electronic chemicals, and trend towards green diesel are contributing towards the success of SM business segment.
MARKETS AND COMPETITION Honeywell competes heavily with other industrial conglomerates and niche firms in the domestic and international markets. Through several divestitures and Source: Yahoo Finance acquisitions, Honeywell is successful in moving away Emerson Electric Co. (EMR) from the commoditized products and offering niche products thereby commanding higher prices. Emerson Electric is a diversified manufacturing company with a wide portfolio of products – process Rising commodity prices and slow domestic demand management, industrial automation, network power, has created tough times moving ahead in 2008 for climate technologies and appliances and tools. industrial machinery suppliers. However, diversification Between 2002 and 2007, CAGR for revenues in US is in core markets, product offerings and geographical 6.3% and for international is 15.2%. In FY 2006-07, reach will provide Honeywell with sustainable revenue company recorded a net profit margin of 9.5% and growth and margin enhancements. increase in net income of 16% from 2006. The ACS segment introduced 300 new products in 2007 company has a market capitalization of 40.47B and alone, an increase of 46% from 2006. Segment recorded revenues of 23.16B in FY 2006-07. completed eight acquisitions in FY07 and added around Rockwell Automation Inc. (ROK) $650 million of annualized sales. Segment also enjoyed 11% organic growth in sales in FY07. Rockwell Automation is the biggest “pure play” industrial automation company in the world with The sheer size of its operations provides Honeywell revenues of $5 B and operating margin close to 20%. greater bargaining power over its suppliers. Also, new Company operates in 80 countries and 46% of the total and innovative product offerings allow Honeywell to revenues in 2007 came from outside US. In 2007, command higher prices and engage in several formula company achieved 19% revenue growth in Latin price agreements that pass the increased raw material America and 21% and 11% revenue growth in India and cost to customers through an increase in price. China respectively. In 2007, revenues from European Honeywell took several Initiatives including Honeywell operations also increased by 14%. Company is Operating System (HOS) and Functional involved in some key acquisition activities and Transformation (FT) in the past few years that resulted expanded its presence in Eastern Europe and Russian in margin improvements in all of its business segments. markets. The company has a market capitalization of Currently HOS and FT are implemented in half of its 8.25B. facilities. Subsequent implementation of these initiatives Siemens A G ADR (SI) over the next 20 years will result in further margin improvements. Company offers a variety of products and services ranging from automation and control, lighting, medical, The primary competitors of Honeywell in the Aerospace power, specialized businesses, transportation and segment are United Technologies (UTX), Rockwell water technologies and services. The company has a Collins (COL), Siemens (SI), General Electric (GE), market capitalization of 116.97B and has a profit margin Goodrich (GR) and Rolls Royce. of 12.82%. Company operates in 190 countries across The primary competitors in the ACS are Rockwell the globe. The company is actively involved in Automation (ROK), Siemens (SI), Emerson Electric acquisitions, divestments and joint ventures. In 2007, (EMR), ABB Ltd., Tyco, Eaton Corp (ETN), etc. company recorded revenues of 107.61B. Honeywell also competes with firms in each of its specific product category in all of its business segments. None of these competitors is the major one for Honeywell. The table below compares Honeywell with some of its competitors on the financial and operating metrics.
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ECONOMIC OUTLOOK GDP
Source: S&P Industry Report The five indicators in PMI are New Orders (30%), Production (20%), Employment (20%), Supplier Deliveries (15%) and Inventories (10%).
Source: Bureau of Economic Analysis
Real GDP growth in the fourth quarter of 2007 was 0.6% at an annual rate. For the third quarter 2007, the According to the latest report on business (ROB) from Institute of Supply Management (ISM), PMI for March figure was 4.9%. 2008 is 48.6%. PMI for February 2008 was 48.3%. PMI Henry Fund analysts forecasted the consensus real below 50% for two consecutive months does not bode GDP growth rate of 0.8% for the next six months. The well for the US economy. decline in the growth rate of real GDP will create a slight impact on the automobile sales. However, even However, high diversity in geography and business with the decline in automobile sales, Honeywell will segments makes Honeywell capable of doing well even continue to do well because of increasing penetration of in tough times in US economy. While moving ahead turbochargers. The Commercial Aerospace and Space with the positive outlook, we want to keep a watch at & Defense business segment will not be affected by the PMI value for the next 3-6 months. decline in the US real GDP growth rate. Capacity Utilization Purchasing Managers’ Index (PMI) Value of PMI below 50% shows contraction in the manufacturing sector. A value below 41% shows contraction in overall economy. PMI went below 50 in December 2007 for the first time since January 2007 raising concerns about the expected recession in the US manufacturing sector. PMI in 2001 was consistently below 50 for the entire year indicating a recession in the economy after the internet bubble burst.
Source: Federal Reserve Board
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Henry B. Tippie School of Management Rising Commodity and Energy Prices
High levels of capacity utilization since January 2006 show good opportunity for capacity expansion. Rates consistently above 80% will require manufacturing companies to increase their capacity. It is evident from the figure above that historically rates below 80 marked the beginning of recession. For February 2008, capacity utilization was 80.9. As the recession will deepen, we expect the value to go below 80 during the next six months.
Prices of energy and industrial metals are at their peak and we expect them to remain at high levels for 2008 because of the increasing demand from emerging markets especially China and India. Among the primary raw materials used in Honeywell products are industrial metals including Titanium, Nickel, Steel and Copper.
The ACS business segment will benefit from the higher commodity prices and energy prices as firms will invest Learning a lesson from the mid 1990 capacity in achieving higher efficiencies and productivity. enhancements and subsequent low utilization rates between 2001 and 2005, companies will not commit investments in capacity enhancement within US. Within US, capacity enhancements are expected to come by increasing labor shifts and improving efficiency and productivity. The trend bodes well for Honeywell ACS business segment as prospective customers will look forward to increase their production efficiency through modernization and use of innovative products and technology offered by Honeywell. Interest Rates The federal funds rate is currently residing at 2.25%. In July 2007, federal funds rate was 6.25%. Henry Fund analyst consensus for the federal funds rate for the next 6 months is 2%. We believe that the rate will remain constant or below the current level for most part of 2008.
Source: www.bondsonline.com Source: S&P Industry Survey
With $1.8 billion outstanding commercial paper and short-term borrowings and $5.4 billion long term debt, lower interest rates reduce the interest expense of Honeywell and thereby benefit the company.
Honeywell engages in long term, fixed price contracts with suppliers and use forward commodity purchase agreements with third parties to hedge its exposure to Moreover, Honeywell issues both fixed rate and floating rising commodity prices. The sheer size of operations of rate debt and engages in interest rates swaps to hedge Honeywell provides it with greater bargaining power over its suppliers. the interest rate risk for its pension obligations and net debt. Honeywell successfully introduced several hundred Also, Honeywell actively engage in acquisition activities new products in 2007. Because of its innovative globally. With good credit ratings Honeywell will be able products, Honeywell is successful in passing the higher to borrow money at the lower interest rates thereby cost of raw materials onto its customers thereby maintaining the profit margin. making the expansion easier.
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Honeywell engages in several long term contracts Turbochargers especially in Aerospace and Specialty Materials Higher fuel and performance efficiency and reduced segment. Honeywell uses inflation and index based emissions are driving growth in turbo technology. clauses to mitigate the risk of higher commodity prices. Increased penetration of turbocharged diesel vehicles However, in the long run, rising commodity prices will in US, strong growth in emerging economies and adversely affect the profit margins of industrial continued sales of turbocharged vehicles in European machinery suppliers including Honeywell. markets are primary drivers of growth in the near and long term future. Also, turbochargers are increasingly CATALYSTS FOR GROWTH used in the light pick-up truck and gasoline vehicle segment. MRO Activities Specialty Materials
We believe that manufacturing firms will look for capacity enhancement opportunities outside US either by starting production in low-cost areas or by global M&A activities.
Increased worldwide regulations for energy efficiency and global warming provide new opportunities in the SM business segment. India and Asia particularly offers growth opportunities. Strong growth We believe that domestic revenues for the industrial strong opportunities also exist in brand security applications automation sector will rely on maintenance, repair and operations (MRO) markets. Given the long lifecycle of and solvents and reagents field. automation systems (20-30 years), companies want to Emerging Semiconductor Industry do business with large suppliers who can provide aftermarket support. Given the cyclical nature of With the increased use of electronics, the revenues, MRO activities will also help in stabilizing semiconductor industry will continue to flourish in the near future. Honeywell’s SM segment also provides revenues year-over-year. metals and chemicals for semiconductors and is MRO activities in the Aerospace and the ACS segment expected to benefit from the increase application of provides stable revenue base to Honeywell and reduce semiconductors. cyclical revenue trends. UOP Increased demand for Sensors UOP caters to refining and petrochemical and gas As per the market research report from Freedonia processing industries. As per the company annual Group, US market for sensors is expected to grow to report, UOP developed 31 of 36 major refining $12.1 billion by 2010 from $10.1 billion in 2005, a technologies used by the industry today and has 2600 CAGR of 3.7%. Honeywell International is in a superior active patents. Currently, 60% of world’s gasoline is position to take advantage from this growth. produced using UOP technology. UOP also has a strong presence in India and China. We expect Increased Aircraft Deliveries continued margin expansion in the SM segment coming The accelerated growth in the commercial aircraft from UOP. UOP also offers strong growth opportunities orders since 2004 resulted from the strong global especially with the expected increase in the use of economic growth and the increased demand of air natural gas over the next 20 years. travel and air cargo from the emerging markets such as China, India and Middle East. INVESTMENT POSITIVES A significant portion of revenues in the Aerospace segment comes from demand of spare parts and maintenance and repair services for existing aircrafts. With the expected growth in the fleet of major airlines and emergence of international and discount carriers, the aftermarket for the Aerospace division is huge.
Outlook for Defense and Space Spending Terrorism poses a big threat to world peace and we expect continued US defense spending for 2008 and beyond the pending presidential elections. Potential future threats necessitate the moderate defense budget spending even after phased pullout from Iraq. Moreover, Honeywell will benefit from the huge aftermarket sales in the defense and space sector.
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Aero strategy, a market research firm, projected the CAGR of 3.6% in MRO market for aircrafts from 2005 to 2015. We believe Honeywell is well positioned to take advantage of this trend. ACS segment introduced 300 new products in 2007 alone, an increase of 46% from 2006. Segment completed eight acquisitions in FY07 and added around $650 million of annualized sales. Segment also enjoyed 11% organic growth in sales in FY07. Even with the shrinking US automotive industry, the global penetration of turbochargers is expected to increase at a rapid pace and Honeywell has positioned itself very well to benefit from this trend.
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Honeywell Operating System (HOS) and Functional Transformation (FT) are the two initiatives taken by Honeywell and already being implemented in 50% of its facilities. As a result, Honeywell consistently achieved margin improvements in all of its business segments and will continue to do so in the future.
The perpetual growth rate is assumed to be 3.5%, almost equivalent to the average US real GDP growth rate. Exhibit 1 shows the growth rate assumptions of several income statement and balance sheet items along with the revenues from each of the three business segments of Honeywell International Inc.
Two-thirds of the contracts in the SM segment have formula price agreements that pass the increased We expect the gross margins to expand in the future raw material cost to customers through an increase with the full implementation of HOS and FT and in price. increase in volume of operations. Sheer size of its operations allows Honeywell to SELL DISCIPLINE achieve margin improvements with the volume We would like to keep a watch for certain future events growth in all of its business segments. including downturn in global economy and emerging markets. We would also like to keep an eye on the US Honeywell engages in long term, fixed price defense spending budget and space programs. Huge contracts with suppliers and use forward commodity declines in the number of new aircraft deliveries and purchase agreements with third parties to hedge its slowdown in aerospace market will have a negative exposure to rising commodity prices. impact on the revenues of Honeywell. Honeywell successfully introduced several hundred Weak penetration of diesel vehicles in US, low demand new products in 2007. Because of its innovative of resins and chemicals, slowdown in the expansion of products, Honeywell is successful in passing the petrochemical refineries, and slowdown in demand from higher cost of raw materials onto its customers emerging markets might cause the growth in revenues thereby maintaining the profit margin. to decline. Downturn in the core business segments of Current subprime mortgage crisis and subsequent Honeywell might also reduce the earning potential and recession seems to have little impact on earnings future cash flows of Honeywell. capacity of Honeywell International Inc. The Commercial Aerospace segment depends on the number of new orders for aircrafts and Space & Defense segment depends on US defense budget and planned military expenditure.
INVESTMENT NEGATIVES
ACS segment is the global leader in home and office climate control equipments. With the negative outlook for domestic residential construction for next 2 years, this portion of business will not be making significant contributions in the top line growth.
Honeywell currently has $7.2 Billion of debt outstanding. We expect Honeywell to continue to engage actively in global acquisitions in the near future. Financing these acquisitions by issuing more debt might increase the cost of debt for Honeywell.
Because of its vast portfolio of products and volume, Honeywell incurred asbestos related liabilities in the past. However, we expect these liabilities to go down in value with time.
VALUATION The revenue growth rate projected for FY 08 is 5.9%. The range of revenue growth rates for Honeywell from 2008 to 2012 is from 5.9% to 9%. We forecasted modest single digit growth rates that are difficult to miss for a diversified company like Honeywell.
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REFERENCES 1. Standard & Poor’s’ Industry Survey, Industrial Machinery, February 2008 2. Institute of Supply Management 3. Federal reserve Board 4. IBIS World Reports 5. Yahoo.finance.com 6. US Bureau of Census 7. Bureau of Economic Analysis (BEA) 8. Henry Fund Analyst Consensus 9. Honeywell Annual Report FY07 10. www.bondsonline.com 11. Standard & Poor’s company report Honeywell International Inc., April 5, 2008
on
12. Credit Suisse Report on Honeywell International Inc., February 26, 2008 13. www.bloomberg.com 14. Bloomberg 15. Boeing Industry Forecast 16. S&P Industry Survey, Aerospace & Defense, January 31 2008 17. www.yahoo.finance.com
IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.
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Exhibit 1 Assumptions
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Exhibit 2 Income Statement
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Exhibit 3 Balance Sheet
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Exhibit 4 Common Size Income Statement
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Exhibit 5 Common Size Balance Sheet
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Exhibit 6 Value Drivers
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Exhibit 7 DCF_EP Valuation
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Exhibit 8 Assumptions & Facts Honeywell International Inc. Weighted Average Cost of Capital (WACC) Estimation
Ticker
Key Assumptions for Honeywell's Valuation Model HON (NYSE)
Current Stock Price Shares Outstanding Effective Tax Rate Normal Cash (% of Revenue) CV Growth Rate Risk-Free Rate Inflation Rate Real Risk Free Rate Market Risk Premium Beta (2 Year Weekly) WACC
57.96 764543613 26.4% 5.0% 3.50% 4.39% 4.28% 0.11% 4.82% 1.300 9.48%
(30 Yr Treasury)
WACC COMPUTATION OF WACC Capital Structure
Proportion
Equity (MV) Debt (BV) Op. Lease Total WACC
44,313 7,657 970 52,940 9.48%
Cost of Equity Risk Free Rate Market Risk Premium Beta Cost of Equity
4.39% 4.82% 1.30 10.66%
Cost of Debt Corporate Bond Rating Cost of debt before taxes Cost of Debt After taxes Cost of Debt after taxes
A 7.30% 3.45% 3.45%
83.70% 14.46% 1.83%
Cost 10.66%
3.45%
Bloomberg
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Exhibit 9 PV of Operating Leases
ESOP
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Exhibit 10 Shares Outstanding
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Exhibit 11 Relative P/E and PEG
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Exhibit 12 Sensitivity Analysis
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Exhibit 13 Sensitivity Analysis
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Exhibit 14 Dividend Discount Model
Honeywell International Inc. Dvidend Discount Model 2008E EPS
$3.76
2009E
2010E
$4.24
$4.94
2011E $5.60
2012E
CV
$6.68
$7.14
Key Assumptions WACC CV ROIC CV Growth Cost of Equity
9.48% 35.42% 3.50% 10.66%
Future Cash Flows P/E Mutliple EPS Next Period Stock Price Dividend FCF DCF Target Price Target Price
12.5 $7.14 $89.22 $1.61 $90.84 57.75
$1.10 $1.10 1.00
$1.21 $1.33 $1.46 $1.21 $1.33 $1.46 1.01 1.01 1.02 61.80 As of last FY End 63.99 As of 5/5/2008 (Growth at Cost of Equity)
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HONEYWELL INTERNATIONAL INC. (HON) Sumit Mundhra [email protected]
Investment Recommendation
BUY
Current Price
$57.19
Target Price Range
$73.00-76.00
INVESTMENT THESIS High diversity in business segments and geography makes Honeywell capable of doing well even in the slowing US economy. High organic growth and new product introductions are driving growth for Honeywell. Automation and Control segment (ACS) alone introduced 300 new products in FY07. Because of its innovative products, Honeywell is successful in passing the higher cost of raw materials onto its customers thereby maintaining higher profit margins. We expect HON to significantly outperform the market in the next 12 months.
HIGHLIGHTS
Source: http://yahoo.finance.com
Key Stock Statistics 52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership 24-Month Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth
$46.07-62.29 $42.57 764.5 78.32% 1.007 1.92% 15.20 4.63 1.23 8.24% 25.81% 12.6%
EPS ($) Year EPS
2005 1.93
2006 2.54
2007 3.20
2008E 3.76
2009E 4.24
Even with the shrinking US automotive industry, the global penetration of turbochargers is expected to increase at a rapid pace and Honeywell has positioned itself very well to benefit from this trend. Honeywell won two-thirds of worldwide orders for turbo chargers in the last two years. Two-thirds of the contracts in the SM segment and several long term contracts in Aerospace have formula price agreements that pass the increased raw material cost to customers through an increase in price.
2010E 4.94
Because of several Initiatives including Honeywell Operating System (HOS) and Functional Transformation (FT), Honeywell has consistently achieved margin improvements in all of its business segments and will continue to do so in the future.
$74.44 $74.44 $54.75 $63.99
Honeywell is highly efficient in its cash deployment and building shareholder value. Since 2003, Honeywell achieved CAGR of 20% in EPS, increased dividends by 10% for four consecutive years, completed share repurchases of $7.8 billion and strategic acquisitions of $5.0 Billion.
All earnings represent earnings from operations and have been filtered from net nonrecurring gains.
Valuation Models Discounted Cash Flow Economic Profit Relative P/E Dividend Discount Model
Maintenance, Repair and Operations (MRO) activities in Aerospace and ACS, Turbochargers in Transportation segment and UOP in Specialty Materials (SM) segment offer tremendous growth opportunities.
Important disclosures appear on the last page of this report.
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EXECUTIVE SUMMARY
Aerospace 1
The Aerospace segment provides integrated avionics, engines, systems and services solutions to aircraft manufacturers, airlines, business and general aviation, military, space and airport operations. Aerospace segment is further divided into Air Transport and The purpose of this report is to provide an in-depth Regional, Business and General Aviation and Defense analysis of the operations and the current business and Space. Defense and Space contributed 41% environment of Honeywell International Inc. The report towards the total aerospace revenues for FY07. looks at the trends in each of the core business segments of Honeywell. We tried to compare Honeywell with its peers and looked at its current and potential core competencies moving ahead in the future. We also identified the risks associated with the company operations and within its core business segments. We also analyzed macro economic trends and their implications for Honeywell. We concluded that expected returns associated with Source: Company Data, Credit Suisse Estimates Honeywell International Inc. is an industrial conglomerate that caters to several sub-segments of industrial sector and is expected to significantly outperform the market in the near future.
investing in Honeywell International far exceeded the Table below summarizes the results of operation for the associated potential risks of investment. Based on our Aerospace segment. analysis and DCF, Economic Profit and Relative P/E valuations, we recommend a BUY on Honeywell International Inc.
COMPANY DESCRIPTION Honeywell Corporation Inc. is a diversified technology and manufacturing company that operates in four business segments – Aerospace, Automation and Control Solutions, Specialty Materials and Transportation Systems. The Graph below highlights the revenue contribution from each of the respective business segments.
Source: Annual Report FY07 Continued US defense spending and increase in the orders of commercial aircrafts in 2008 and beyond bodes well for the Aerospace segment. Moreover, MRO activities will continue to provide stable revenues for the Aerospace segment. Automation and Control Solutions (ACS) The ACS3 segment provides environmental and combustion controls, sensing controls, security and life safety products and services, and process automation and building solutions and services for homes, buildings and industrial facilities. ACS is one of the fastest growing business segments of Honeywell.
Source: Annual report FY07
ACS Revenue by Sub-Sector
Source: Company Data, Credit Suisse Estimates 1
Source: Annual Report FY07
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Annual Report FY07
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Table below summarizes the results of operation for the segment of Honeywell. Outlook for resins and ACS. chemicals business is positive owing to the strong demand from the emerging economies. SM segment offers the best growth opportunities going forward. Transportation Systems 3
The Transportation systems segment provides engine boosting systems for commercial vehicles and passenger cars. Honeywell is also a leading provider of automotive care and braking products. There are two sub sectors – Consumer Products Group (CGP) and Source: Annual Report FY07 Turbochargers. CGP includes several strong brands of Increase demand for sensors and MRO activities will car care products including FRAM filters, Prestone drive the domestic growth for ACS. Strong demand antifreeze, Autolite spark plugs, and Simoniz car from the emerging economies including China and India waxes. provide excellent growth opportunities for the ACS in Transportation Revenues by Sub-Sector 2008 and beyond. Honeywell introduced 300 new products and completed 8 new acquisitions in 2007 alone to more than offset the impact of a slowdown in the residential home construction in US. We expect ACS to continue to provide tremendous growth opportunities in the future. Specialty Materials (SM) The Specialty Materials3 segment provides high performance specialty materials including fluorine products, specialty films and additives, advanced fibers and composites, intermediates, specialty chemicals, electronic materials and chemicals, and catalysts, adsorbents, equipment and technologies for the Source: Company Data, Credit Suisse Estimates petrochemical and refining industries. Specialty Materials Revenues by Sub-Sector
Source: Annual report FY07 Increased penetration of turbocharged diesel vehicles in US, strong growth in emerging economies and Source: Company Data, Credit Suisse Estimates continued sales of turbocharged vehicles in European Table below summarizes the results of operation for the markets are primary drivers of growth in the near and long term future. SM segment.
RECENT DEVELOPMENTS In April 2008, Honeywell won a $23 Billion contract to supply next generation HTF7500-E Turbofan propulsion system for new Embraer business jets. In 2007, the AT&R segment from Aerospace division received a contract from Airbus for its A350 XWB aircrafts. The contract is worth $16 billion and will be realized over a period of 20-25 years.
Source: Annual report FY07
Acquisition of UOP in November 2005 resulted in AT&R also won a contract worth $490 million with North margin enhancements and increase in sales for the SM Western airlines for the repair and maintenance of its
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aircraft fleet. Honeywell also received $1 billion aftermarket contract from Air Tran and successfully won Auxiliary Power Units contract for 196 planes of US Airways. With the increased air traffic worldwide and continued infrastructure expansion of airports around the globe, outlook for Runway Awareness and Advisory Systems (RAAS), Enhanced Ground Proximity Warning Systems and Integrated Primary Flight Display products is positive in the near future. SM segment underwent a series of divestitures and acquisitions that resulted in increased margins and transition from commoditized based products to specialized products that cater to growing and high margin end markets. Currently, nearly two-thirds of the contracts in the SM segment have formula price agreements that pass the increased raw material cost to customers through an increase in price.
Source: Boeing The third important value driver is the overall profitability of the airline industry. If an airline is running into operating losses, new orders for commercial airplanes will be less regardless of the fleet age. International and discount carriers are doing better than the US based legacy airlines and orders in 2007 soared to 2340 from 1882 in 2006 and 2139 in 2005.
INDUSTRY TRENDS
As per the forecast by Boeing, the world air cargo traffic Aircraft demand is closely associated with the long term is expected to triple by 2026. The air cargo market is passenger air traffic growth rate. As per Avitas, a predicted to grow by 6.1 percent per year. By 2026, the market research firm, the global commercial aircraft cargo fleet will double from 1,980 to 3,980 airplanes. fleet will grow at CAGR of 4.3% until 2025.
The second value driver is the average age of the fleet. The average life of a commercial plane is around 20 years. The average fleet age in Europe was less than 10 years, about 11 years in Asia and about 12 years in US in 2006. Hence, some US carriers are due for investments in new fleet as actual age might be more than the average age of 12.
Source: Boeing The depth and breadth of ACS segment across geographies and diverse product offerings for home, commercial and industrial sectors put the ACS segment among the most promising business segments of Honeywell. MRO activities and acquisitions will drive the domestic growth while continued strong demand from China and India will boost Y-Y revenue growth. In the Transportation segment, Honeywell won 66% of worldwide orders in the last two years for turbochargers. The use of turbochargers helps reduce the CO2 emissions by 30% and increase fuel efficiency while maintaining vehicle performance. As per the S&P
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industry survey, strong growth is expected in the turbo diesel segment in US, China and India. Continued capacity expansion in the refining and petro chemical industry, strong global demand for non-ozone depleting HFC products and electronic chemicals, and trend towards green diesel are contributing towards the success of SM business segment.
MARKETS AND COMPETITION Honeywell competes heavily with other industrial conglomerates and niche firms in the domestic and international markets. Through several divestitures and Source: Yahoo Finance acquisitions, Honeywell is successful in moving away Emerson Electric Co. (EMR) from the commoditized products and offering niche products thereby commanding higher prices. Emerson Electric is a diversified manufacturing company with a wide portfolio of products – process Rising commodity prices and slow domestic demand management, industrial automation, network power, has created tough times moving ahead in 2008 for climate technologies and appliances and tools. industrial machinery suppliers. However, diversification Between 2002 and 2007, CAGR for revenues in US is in core markets, product offerings and geographical 6.3% and for international is 15.2%. In FY 2006-07, reach will provide Honeywell with sustainable revenue company recorded a net profit margin of 9.5% and growth and margin enhancements. increase in net income of 16% from 2006. The ACS segment introduced 300 new products in 2007 company has a market capitalization of 40.47B and alone, an increase of 46% from 2006. Segment recorded revenues of 23.16B in FY 2006-07. completed eight acquisitions in FY07 and added around Rockwell Automation Inc. (ROK) $650 million of annualized sales. Segment also enjoyed 11% organic growth in sales in FY07. Rockwell Automation is the biggest “pure play” industrial automation company in the world with The sheer size of its operations provides Honeywell revenues of $5 B and operating margin close to 20%. greater bargaining power over its suppliers. Also, new Company operates in 80 countries and 46% of the total and innovative product offerings allow Honeywell to revenues in 2007 came from outside US. In 2007, command higher prices and engage in several formula company achieved 19% revenue growth in Latin price agreements that pass the increased raw material America and 21% and 11% revenue growth in India and cost to customers through an increase in price. China respectively. In 2007, revenues from European Honeywell took several Initiatives including Honeywell operations also increased by 14%. Company is Operating System (HOS) and Functional involved in some key acquisition activities and Transformation (FT) in the past few years that resulted expanded its presence in Eastern Europe and Russian in margin improvements in all of its business segments. markets. The company has a market capitalization of Currently HOS and FT are implemented in half of its 8.25B. facilities. Subsequent implementation of these initiatives Siemens A G ADR (SI) over the next 20 years will result in further margin improvements. Company offers a variety of products and services ranging from automation and control, lighting, medical, The primary competitors of Honeywell in the Aerospace power, specialized businesses, transportation and segment are United Technologies (UTX), Rockwell water technologies and services. The company has a Collins (COL), Siemens (SI), General Electric (GE), market capitalization of 116.97B and has a profit margin Goodrich (GR) and Rolls Royce. of 12.82%. Company operates in 190 countries across The primary competitors in the ACS are Rockwell the globe. The company is actively involved in Automation (ROK), Siemens (SI), Emerson Electric acquisitions, divestments and joint ventures. In 2007, (EMR), ABB Ltd., Tyco, Eaton Corp (ETN), etc. company recorded revenues of 107.61B. Honeywell also competes with firms in each of its specific product category in all of its business segments. None of these competitors is the major one for Honeywell. The table below compares Honeywell with some of its competitors on the financial and operating metrics.
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ECONOMIC OUTLOOK GDP
Source: S&P Industry Report The five indicators in PMI are New Orders (30%), Production (20%), Employment (20%), Supplier Deliveries (15%) and Inventories (10%).
Source: Bureau of Economic Analysis
Real GDP growth in the fourth quarter of 2007 was 0.6% at an annual rate. For the third quarter 2007, the According to the latest report on business (ROB) from Institute of Supply Management (ISM), PMI for March figure was 4.9%. 2008 is 48.6%. PMI for February 2008 was 48.3%. PMI Henry Fund analysts forecasted the consensus real below 50% for two consecutive months does not bode GDP growth rate of 0.8% for the next six months. The well for the US economy. decline in the growth rate of real GDP will create a slight impact on the automobile sales. However, even However, high diversity in geography and business with the decline in automobile sales, Honeywell will segments makes Honeywell capable of doing well even continue to do well because of increasing penetration of in tough times in US economy. While moving ahead turbochargers. The Commercial Aerospace and Space with the positive outlook, we want to keep a watch at & Defense business segment will not be affected by the PMI value for the next 3-6 months. decline in the US real GDP growth rate. Capacity Utilization Purchasing Managers’ Index (PMI) Value of PMI below 50% shows contraction in the manufacturing sector. A value below 41% shows contraction in overall economy. PMI went below 50 in December 2007 for the first time since January 2007 raising concerns about the expected recession in the US manufacturing sector. PMI in 2001 was consistently below 50 for the entire year indicating a recession in the economy after the internet bubble burst.
Source: Federal Reserve Board
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High levels of capacity utilization since January 2006 show good opportunity for capacity expansion. Rates consistently above 80% will require manufacturing companies to increase their capacity. It is evident from the figure above that historically rates below 80 marked the beginning of recession. For February 2008, capacity utilization was 80.9. As the recession will deepen, we expect the value to go below 80 during the next six months.
Prices of energy and industrial metals are at their peak and we expect them to remain at high levels for 2008 because of the increasing demand from emerging markets especially China and India. Among the primary raw materials used in Honeywell products are industrial metals including Titanium, Nickel, Steel and Copper.
The ACS business segment will benefit from the higher commodity prices and energy prices as firms will invest Learning a lesson from the mid 1990 capacity in achieving higher efficiencies and productivity. enhancements and subsequent low utilization rates between 2001 and 2005, companies will not commit investments in capacity enhancement within US. Within US, capacity enhancements are expected to come by increasing labor shifts and improving efficiency and productivity. The trend bodes well for Honeywell ACS business segment as prospective customers will look forward to increase their production efficiency through modernization and use of innovative products and technology offered by Honeywell. Interest Rates The federal funds rate is currently residing at 2.25%. In July 2007, federal funds rate was 6.25%. Henry Fund analyst consensus for the federal funds rate for the next 6 months is 2%. We believe that the rate will remain constant or below the current level for most part of 2008.
Source: www.bondsonline.com Source: S&P Industry Survey
With $1.8 billion outstanding commercial paper and short-term borrowings and $5.4 billion long term debt, lower interest rates reduce the interest expense of Honeywell and thereby benefit the company.
Honeywell engages in long term, fixed price contracts with suppliers and use forward commodity purchase agreements with third parties to hedge its exposure to Moreover, Honeywell issues both fixed rate and floating rising commodity prices. The sheer size of operations of rate debt and engages in interest rates swaps to hedge Honeywell provides it with greater bargaining power over its suppliers. the interest rate risk for its pension obligations and net debt. Honeywell successfully introduced several hundred Also, Honeywell actively engage in acquisition activities new products in 2007. Because of its innovative globally. With good credit ratings Honeywell will be able products, Honeywell is successful in passing the higher to borrow money at the lower interest rates thereby cost of raw materials onto its customers thereby maintaining the profit margin. making the expansion easier.
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Honeywell engages in several long term contracts Turbochargers especially in Aerospace and Specialty Materials Higher fuel and performance efficiency and reduced segment. Honeywell uses inflation and index based emissions are driving growth in turbo technology. clauses to mitigate the risk of higher commodity prices. Increased penetration of turbocharged diesel vehicles However, in the long run, rising commodity prices will in US, strong growth in emerging economies and adversely affect the profit margins of industrial continued sales of turbocharged vehicles in European machinery suppliers including Honeywell. markets are primary drivers of growth in the near and long term future. Also, turbochargers are increasingly CATALYSTS FOR GROWTH used in the light pick-up truck and gasoline vehicle segment. MRO Activities Specialty Materials
We believe that manufacturing firms will look for capacity enhancement opportunities outside US either by starting production in low-cost areas or by global M&A activities.
Increased worldwide regulations for energy efficiency and global warming provide new opportunities in the SM business segment. India and Asia particularly offers growth opportunities. Strong growth We believe that domestic revenues for the industrial strong opportunities also exist in brand security applications automation sector will rely on maintenance, repair and operations (MRO) markets. Given the long lifecycle of and solvents and reagents field. automation systems (20-30 years), companies want to Emerging Semiconductor Industry do business with large suppliers who can provide aftermarket support. Given the cyclical nature of With the increased use of electronics, the revenues, MRO activities will also help in stabilizing semiconductor industry will continue to flourish in the near future. Honeywell’s SM segment also provides revenues year-over-year. metals and chemicals for semiconductors and is MRO activities in the Aerospace and the ACS segment expected to benefit from the increase application of provides stable revenue base to Honeywell and reduce semiconductors. cyclical revenue trends. UOP Increased demand for Sensors UOP caters to refining and petrochemical and gas As per the market research report from Freedonia processing industries. As per the company annual Group, US market for sensors is expected to grow to report, UOP developed 31 of 36 major refining $12.1 billion by 2010 from $10.1 billion in 2005, a technologies used by the industry today and has 2600 CAGR of 3.7%. Honeywell International is in a superior active patents. Currently, 60% of world’s gasoline is position to take advantage from this growth. produced using UOP technology. UOP also has a strong presence in India and China. We expect Increased Aircraft Deliveries continued margin expansion in the SM segment coming The accelerated growth in the commercial aircraft from UOP. UOP also offers strong growth opportunities orders since 2004 resulted from the strong global especially with the expected increase in the use of economic growth and the increased demand of air natural gas over the next 20 years. travel and air cargo from the emerging markets such as China, India and Middle East. INVESTMENT POSITIVES A significant portion of revenues in the Aerospace segment comes from demand of spare parts and maintenance and repair services for existing aircrafts. With the expected growth in the fleet of major airlines and emergence of international and discount carriers, the aftermarket for the Aerospace division is huge.
Outlook for Defense and Space Spending Terrorism poses a big threat to world peace and we expect continued US defense spending for 2008 and beyond the pending presidential elections. Potential future threats necessitate the moderate defense budget spending even after phased pullout from Iraq. Moreover, Honeywell will benefit from the huge aftermarket sales in the defense and space sector.
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Aero strategy, a market research firm, projected the CAGR of 3.6% in MRO market for aircrafts from 2005 to 2015. We believe Honeywell is well positioned to take advantage of this trend. ACS segment introduced 300 new products in 2007 alone, an increase of 46% from 2006. Segment completed eight acquisitions in FY07 and added around $650 million of annualized sales. Segment also enjoyed 11% organic growth in sales in FY07. Even with the shrinking US automotive industry, the global penetration of turbochargers is expected to increase at a rapid pace and Honeywell has positioned itself very well to benefit from this trend.
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Honeywell Operating System (HOS) and Functional Transformation (FT) are the two initiatives taken by Honeywell and already being implemented in 50% of its facilities. As a result, Honeywell consistently achieved margin improvements in all of its business segments and will continue to do so in the future.
The perpetual growth rate is assumed to be 3.5%, almost equivalent to the average US real GDP growth rate. Exhibit 1 shows the growth rate assumptions of several income statement and balance sheet items along with the revenues from each of the three business segments of Honeywell International Inc.
Two-thirds of the contracts in the SM segment have formula price agreements that pass the increased We expect the gross margins to expand in the future raw material cost to customers through an increase with the full implementation of HOS and FT and in price. increase in volume of operations. Sheer size of its operations allows Honeywell to SELL DISCIPLINE achieve margin improvements with the volume We would like to keep a watch for certain future events growth in all of its business segments. including downturn in global economy and emerging markets. We would also like to keep an eye on the US Honeywell engages in long term, fixed price defense spending budget and space programs. Huge contracts with suppliers and use forward commodity declines in the number of new aircraft deliveries and purchase agreements with third parties to hedge its slowdown in aerospace market will have a negative exposure to rising commodity prices. impact on the revenues of Honeywell. Honeywell successfully introduced several hundred Weak penetration of diesel vehicles in US, low demand new products in 2007. Because of its innovative of resins and chemicals, slowdown in the expansion of products, Honeywell is successful in passing the petrochemical refineries, and slowdown in demand from higher cost of raw materials onto its customers emerging markets might cause the growth in revenues thereby maintaining the profit margin. to decline. Downturn in the core business segments of Current subprime mortgage crisis and subsequent Honeywell might also reduce the earning potential and recession seems to have little impact on earnings future cash flows of Honeywell. capacity of Honeywell International Inc. The Commercial Aerospace segment depends on the number of new orders for aircrafts and Space & Defense segment depends on US defense budget and planned military expenditure.
INVESTMENT NEGATIVES
ACS segment is the global leader in home and office climate control equipments. With the negative outlook for domestic residential construction for next 2 years, this portion of business will not be making significant contributions in the top line growth.
Honeywell currently has $7.2 Billion of debt outstanding. We expect Honeywell to continue to engage actively in global acquisitions in the near future. Financing these acquisitions by issuing more debt might increase the cost of debt for Honeywell.
Because of its vast portfolio of products and volume, Honeywell incurred asbestos related liabilities in the past. However, we expect these liabilities to go down in value with time.
VALUATION The revenue growth rate projected for FY 08 is 5.9%. The range of revenue growth rates for Honeywell from 2008 to 2012 is from 5.9% to 9%. We forecasted modest single digit growth rates that are difficult to miss for a diversified company like Honeywell.
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REFERENCES 1. Standard & Poor’s’ Industry Survey, Industrial Machinery, February 2008 2. Institute of Supply Management 3. Federal reserve Board 4. IBIS World Reports 5. Yahoo.finance.com 6. US Bureau of Census 7. Bureau of Economic Analysis (BEA) 8. Henry Fund Analyst Consensus 9. Honeywell Annual Report FY07 10. www.bondsonline.com 11. Standard & Poor’s company report Honeywell International Inc., April 5, 2008
on
12. Credit Suisse Report on Honeywell International Inc., February 26, 2008 13. www.bloomberg.com 14. Bloomberg 15. Boeing Industry Forecast 16. S&P Industry Survey, Aerospace & Defense, January 31 2008 17. www.yahoo.finance.com
IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.
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Exhibit 1 Assumptions
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Exhibit 2 Income Statement
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Exhibit 3 Balance Sheet
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Exhibit 4 Common Size Income Statement
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Exhibit 5 Common Size Balance Sheet
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Exhibit 6 Value Drivers
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Exhibit 7 DCF_EP Valuation
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Exhibit 8 Assumptions & Facts Honeywell International Inc. Weighted Average Cost of Capital (WACC) Estimation
Ticker
Key Assumptions for Honeywell's Valuation Model HON (NYSE)
Current Stock Price Shares Outstanding Effective Tax Rate Normal Cash (% of Revenue) CV Growth Rate Risk-Free Rate Inflation Rate Real Risk Free Rate Market Risk Premium Beta (2 Year Weekly) WACC
57.96 764543613 26.4% 5.0% 3.50% 4.39% 4.28% 0.11% 4.82% 1.300 9.48%
(30 Yr Treasury)
WACC COMPUTATION OF WACC Capital Structure
Proportion
Equity (MV) Debt (BV) Op. Lease Total WACC
44,313 7,657 970 52,940 9.48%
Cost of Equity Risk Free Rate Market Risk Premium Beta Cost of Equity
4.39% 4.82% 1.30 10.66%
Cost of Debt Corporate Bond Rating Cost of debt before taxes Cost of Debt After taxes Cost of Debt after taxes
A 7.30% 3.45% 3.45%
83.70% 14.46% 1.83%
Cost 10.66%
3.45%
Bloomberg
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Exhibit 9 PV of Operating Leases
ESOP
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Exhibit 10 Shares Outstanding
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Exhibit 11 Relative P/E and PEG
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Exhibit 12 Sensitivity Analysis
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Exhibit 13 Sensitivity Analysis
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Exhibit 14 Dividend Discount Model
Honeywell International Inc. Dvidend Discount Model 2008E EPS
$3.76
2009E
2010E
$4.24
$4.94
2011E $5.60
2012E
CV
$6.68
$7.14
Key Assumptions WACC CV ROIC CV Growth Cost of Equity
9.48% 35.42% 3.50% 10.66%
Future Cash Flows P/E Mutliple EPS Next Period Stock Price Dividend FCF DCF Target Price Target Price
12.5 $7.14 $89.22 $1.61 $90.84 57.75
$1.10 $1.10 1.00
$1.21 $1.33 $1.46 $1.21 $1.33 $1.46 1.01 1.01 1.02 61.80 As of last FY End 63.99 As of 5/5/2008 (Growth at Cost of Equity)
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