Last night on Mad Money, Jim Cramer when in-depth on Honeywell (HON) stock. For someone who specializes in his quick reactions to a barrage of stocks in the “lightening round”, you know that when he spends 15 minutes on one company that he really has something to say. Cramer loves the way that CEO David Cote is running the business of the diversified technology and manufacturing company saying:
“…Which brings me to the maker of this engine. Honeywell, and a conclusion you may not believe. Not every company’s tainted. There are still some stocks we like. The stocks of companies that were ready for the downturn. And also happened to have accidentally high, notoriously big juicy yield because the market’s taken them down, punished them too severely. Honeywell, HON, is a diversified industrial company that fits the profile, 4.2% yield and a business and importantly, a management team that I think can weather the downturn much better than others. Plus, 50% of Honeywell’s portfolio of products relate to energy efficiency. So, it’s a company that’s in keeping with the priorities of the Obama Administration. Especially given that we believe energy’s done going down and governments worldwide now led by Obama, like it or not, won’t tolerate global warming anymore. Just yesterday Honeywell’s CEO David Cote affirmed his company’s 2009 forecast despite all the gloom, despite recognizing that 2009 will be a tough year. He’s a realist. He said what we want to hear, …
The engine business is flying. Honeywell looks like a survivor to me. I just want to know if it’s been cutting back for a long time. The company’s been restructuring for years. It’s ongoing. After the last three years, Honeywell’s incurred $717 million in restructuring charges, but with a lot of restructuring behind it, it’s in much better position than in companies that have to take more dramatic actions now. It thought ahead.”
Ockham’s Take: We have to agree with Mr. Cramer on this one. Honeywell is a fabulous company that is down more than 50% in the last year. As Cramer described the company has more than 400 new products being unveiled this year alone, many of them with innovations towards energy efficiency. This should help the company to continue its strong historical sales growth of about 8% over each of the last 5 years. However, even more impressive is the company’s near doubling of cash flow over that same 5 year period. This is a strong endorsement to the management that Cramer praised. But as of right now the market is not giving Honeywell enough credit for their cash, as the company has historically traded between 6.2x and 10.7x multiples of price-to-cash flow, but at present levels that metric is only 5.2x.
So, Honeywell looks better equipped than most to ride out the storm and the 4.2% yield is not a bad return until the market begins to come around. As you can see, it is no surprise that we currently have an Undervalued valuation on Honeywell.