Summary
Honeywell is a ‘best-in-class’ industrial.
After the recent spin-offs, the company is leaner and looking to invest in higher growth segments.
The company has a pristine balance sheet and impressive free cash flow.
It pays a 2.2% dividend and actively buying back shares.
Honeywell is slightly undervalued.
Investment thesis
Honeywell International (HON) is a high-quality industrial, led by a diverse and young management team. The company has a good mix of cyclical and non-cyclical segments and is diversified geographically. Over the past 10 years, its top-line has been growing consistently at the inflation rate -- nothing sexy but what it has done very well is as it scales it has expanded the operating margins from 9.7% to current 17.6%. Its free cash flow has also doubled over the same period. It’s a solid achievement considering their leverage ratio barely budged.
With minimal growth, Honeywell has been using its surplus resource to buy back shares and pay out a 2.2% dividend. Interestingly, it currently commands an attractive FCF multiple compared to the S&P500. We think this company is a solid defensive investment and could add diversification power to ones’ portfolio.
