Honeywell International: a Glimpse of Hope for Inflation Aware Value Investor

After yesterday’s FOMC-look-alike lackluster presentation of Fed’s chief Jerome Powell before the Congressional leaders, the question of quality investment has been lifted to new highs.

As the Fed has little resources to fight a possibility of a prolonged, rather than transitory, inflation, holding inherently inflationary names in our portfolios can cost us fortune at the end of the day.

Honeywell (HON) reported its last quarterly financial results on April 23. Q1 Non-GAAP EPS of $1.92 exceeded consensus by $0.12, while GAAP EPS of $2.03 had beaten it by $0.22. Revenue of $8.46 billion (flat YoY despite Covid-related difficulties) also beat by $380 million.

Interestingly, FY21 guidance doesn't look intimidating: the management keeps targeting EPS of $7.75-$8.00 vs. $7.91 consensus, while revenue is sought in the range of $34.0 billion to $34.8 billion vs. $34.32 billion consensus, i.e. also in the middle of the range. Previously, the company's Q4 Non-GAAP EPS came in at $ 2.07, 7 cents better than forecast, while revenue of $ 8.9 billion (-6.3% YoY), exceeded expectations by $510 million.

Honeywell spun off the Butz-Thermo Electric Regulator, which in 1885 designed the predecessor to the modern thermostat. Originally developing climate control technology that still works today, Honeywell has grown into a sprawling conglomerate with operations around the world. Today it operates in four business segments: Aerospace, Building Technology, Consumables and Technology, and Safety and Productivity Solutions. Due to its high level of diversification and service to various end markets, it is classified in the sectors of the US defense industry, as well as e-commerce and the oil and gas industry.

Honeywell (HON) recently announced partnership with Defence Research Development Organisation (DRDO) and with the Council of Scientific and Industrial Research–Indian Institute of Petroleum (CSIR–IIP), Government of India, to supply molecular sieve adsorbents (zeolites) to accelerate setting up of Medical Oxygen Plants in the country to address the ongoing pandemic needs.

HON shares yesterday added 1.65% despite the overall negative tone of the indices, and today they grew further around 0.7% on the premarket. As one of the most well-known blue chips – a permanent component of conservative portfolios with a dividend yield of about 2% – this stock rarely shows strong upward or downward dynamics. However, its advance from $216 to around $228 in a matter of just one month, while the uptrend looks to have been strengthening, suggests new records down the road. Positivity of the company's current forecasts are partially linked to the recovery of the Boeing Corporation from the crisis, which is currently considered a baseline scenario.

At P/E of around 35x and gross margin of over 32%, Honeywell International looks like one of not-so-many-left value stocks. The stock constantly, quarter by quarter, beats forecasts in terms of both EPS and revenues, and since its next reporting date, July 23, is not so distant, it's worth finding a certain allocation share of HON in our portfolios.