- By GF Value
The stock of Honeywell International (NAS:HON, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $227.81 per share and the market cap of $158.2 billion, Honeywell International stock gives every indication of being significantly overvalued. GF Value for Honeywell International is shown in the chart below.
Because Honeywell International is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Honeywell International has a cash-to-debt ratio of 0.59, which ranks in the middle range of the companies in Industrial Products industry. Based on this, GuruFocus ranks Honeywell International's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Honeywell International over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Honeywell International has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $32.6 billion and earnings of $6.54 a share. Its operating margin is 16.90%, which ranks better than 87% of the companies in Industrial Products industry. Overall, the profitability of Honeywell International is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Honeywell International over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Honeywell International's 3-year average revenue growth rate is worse than 72% of the companies in Industrial Products industry. Honeywell International's 3-year average EBITDA growth rate is -1.5%, which ranks in the middle range of the companies in Industrial Products industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Honeywell International's return on invested capital is 10.42, and its cost of capital is 7.66. The historical ROIC vs WACC comparison of Honeywell International is shown below:
In summary, the stock of Honeywell International (NAS:HON, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about Honeywell International stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.