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International Stock Opportunity - Honeywell International Inc.

Honeywell traces its roots to inventor Albert Butz’s company, the Butz-Thermo Electric Regulator Company in 1885, which produced a predecessor to the modern thermostat. Honeywell has since developed into a conglomerate, operating four primary business segments, Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Honeywell is increasingly transforming itself into a software-industrial company serving diverse end markets like U.S. defence, e-commerce, and oil & gas.

Our research provider Morningstar view Honeywell as one of the highest quality companies in the diversified industrials space and assign the firm a wide economic moat (strong competitive advantages). They attribute this rating primarily to intangible assets and switching costs, and secondarily due to cost advantage. Over a normalized cycle, which includes 10-year historical figures and explicit five-year projections, they estimate that Honeywell earns about a 22% return on invested capital, inclusive of goodwill, or about 13 points above our weighted average cost of capital of 8.5%. Furthermore, in none of these years did Honeywell ever fall below the estimated cost of capital.

As such, they have a high degree of confidence in Honeywell’s ability to generate excess returns 10 years into the future, and believe it is more likely than not it will continue to do so 20 years into the future. Honeywell has a robust financial position with bank debt gearing at 28% (Debt/Capital of 46%), net interest coverage ratio of 22 times and positive Free Cash Flow over the past 4 years. In regards to ethical considerations, it’s worth noting that Honeywell supply parts and support units to the defence industry. The company’s share price has fallen 25% for the year, last traded at $132 USD per share.

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