Safety and security is certainly prevalent in the current uncertain world that we face today.  With terrorism and mass shootings in the headlines, there is a strong need for increased safety and security systems. Honeywell (HON) is a company that provides valued solutions for the safety and security of consumers and businesses.    

Honeywell has short- and long-term catalysts that are likely to drive the stock to outperform the S&P 500. The company has a good track record of making strategic acquisitions to grow the business over the long-term. The recent positive earnings report and increased earnings guidance is likely to catalyze the stock for the short-term.

Honeywell’s stock is likely to move higher in the short-term before its next earnings report in June. The reason for that is a result of the company’s increased earnings guidance for FY16. Previous estimates for EPS of $6.45 to $6.70 were increased to the top of the range to $6.55 to $6.70.This shows that management is confident that the company will achieve earnings in the upper range. Investors are likely to get bullish when earnings guidance is increased as they anticipate strong future results for the fiscal year.

The short-term earnings increases are being driven by restructuring and cost management, thus leading to margin expansion. The 1% to 2% organic sales growth that the company is expecting will add to the total revenue gains being derived from acquisitions. 

Honeywell’s acquisitions help the company to grow revenue. The acquisition strategy allows the company to add on new technology to strengthen the business and drive new growth. The recent acquisition of Xtralis adds growth to Honeywell’s Security and Fire Business. Xtralis will allow Honeywell to meet the needs of customers as they seek early and reliable smoke detection.  Xtralis’ technology detects smoke in the very early stages of a fire.The early detection can help emergency responders to save lives and prevent building damage. 

The acquisition of RSI Video brings additional value to Honeywell’s security dealers. RSI helps to reduce false alarms through video verification solutions. This will help to separate the false alarms from actual situations, thus reducing wasted efforts by law enforcement of responding to non-issues.

The Movilizer acquisition gives Honeywell a cloud platform which allows customers to manage workflow solutions from anywhere using their existing IT systems. Customers can benefit from increased flexibility and higher productivity by using Movilizer.This will also expand Honeywell’s software capabilities as a provider of the Industrial Internet of Things.This allows customers to get increased productivity, safety, and security for workers and buildings. 

Those acquisitions are just a few recent examples of what Honeywell does to expand its business on a regular basis.The company will seek out and purchase businesses that complement and enhance Honeywell’s current offerings.Therefore, the company gets stronger over the long-term in terms of revenue and also in terms of value to its customers. 

Innovations as a Catalyst

Innovations are another method Honeywell uses to increase revenue. Honeywell’s newest innovation is its involvement with the Industrial Internet of Things [IIoT].   The IIoT allows information to be a competitive advantage in manufacturing environments. 

Honeywell’s efforts in IIoT involve a focus on optimizing users existing automation by leveraging what they already have. Specifically, this involves:connected assets and devices, data management and onsite control, analytics, and secure collaboration. 

Honeywell’s approach to leverage its customer’s existing automation is a less-costly and more desirable way to optimize operations rather than tearing everything out and building from scratch.The company has a good combination of industry expertise along with IT capabilities.This is what makes the company desirable to its customers, which will help grow revenue for Honeywell going forward. 

The company’s Command and Control Suite is an innovation that can help businesses improve industrial security and safety in a way that minimizes disruption to regular operations. For example: evacuations, safety incidents, and security breaches can be disruptive to normal operations.Honeywell’s Command and Control Suite enhances the integration of safety and security through entire facilities. This allows key decision makers to effectively manage incidents and to continually improve safety and security. 

Customers benefit from higher productivity from the Command and Control Suite because it reduces training time and errors. It provides users with real-time information which complements security personnel’s knowledge. Ultimately, it lowers costs for customers as productivity increases. Therefore, the Suite is likely to attract customers and revenue and they seek to lower costs while enhancing their facilities’ safety and security.

There are numerous other examples of Honeywell’s innovations. The important thing for investors to know is that Honeywell continually strives to innovate to give customers tangible value.Innovation is likely to remain a long-term catalyst for the company’s revenue growth and the stock for the long-term.

Fundamentals

Honeywell has strong fundamentals to drive and support growth for the short- and long-term. The balance sheet is solid with 1.25X more current assets than current liabilities.So, the company is likely to easily handle its short-term obligations. 

Honeywell also keeps its balance sheet strong for the long-term. The company has 1.6X more total assets than total liabilities. This will increase the likelihood of Honeywell to handle its longer-term debt obligations. 

The fundamentals are further enhanced as a result of growing cash flow. The company is projecting free cash flow growth of 5% to 10% for the full year in 2016. That free cash flow growth is what will be used for shareholder friendly dividends and share repurchases going forward. 

Honeywell’s dividend yield of 2% can be maintained even as the stock price increases since the company can afford to raise the dividend payments. However, Honeywell tends to put large sums towards share repurchases.The company recently announced a $5 billion stock repurchase plan. 

The good thing about the repurchase plan is that it is likely to help increase EPS, which helps drive the stock higher. As shares are bought, the existing shares have less dilution, which puts upward pressure on the stock.One drawback to this is less money is used to pay a dividend.Therefore, the dividend increases may not be as generous as they could be. 

Consensus estimates show that Honeywell is expected to grow total revenue at 5% this year and 3.7% next year. The revenue growth and Honeywell’s gross margin of about 31% will help support its expected earnings growth of 9% for this year and 8.7% for next year. Honeywell’s expected earnings growth is higher than the S&P 500’s average expected growth of between 6% and 7% for the next two years.Therefore, I think the stock will outperform the S&P 500 over the next two years.

If the company meets/exceeds its estimates for most of its quarters, I think that stock can rise approximately in-line with earnings growth.Therefore, I expect the stock to experience to gain 9% in one year and about 18% in two years.  

Conclusion

Honeywell is likely to be a solid dividend investment going forward. I expect near-term positive momentum for the stock over the next few months as a result of the increased earnings guidance.  I also think that the stock will perform well over the long-term as the company continues to attract revenue dollars from customers that aim to make their businesses safer while keeping costs under control through value-added innovations and acquisitions.Therefore, Honeywell investors are likely to make money with the stock edging higher than the S&P 500 over the next two years. At the same time, Honeywell will help make the world a safer place with its focus on safety/security solutions.