Honeywell International Inc. (NYSE:HON)

This article defines the fair value of Honeywell International Inc. (NYSE:HON) using an earnings driven approach.  Our focus is on earnings growth in particular and we evaluate earnings growth and compare that to the PE multiple to define value using a peg ratio approach.  In the process we discount seasonal anomalies by including complete earnings cycles and exclude onetime events to focus on truer growth rates.

Our observation for Honeywell suggests that earnings growth at Honeywell had been between 6 and 8% consistently until recently, when earnings growth began to ramp up.  In the fourth quarter of 2014 earnings growth was 10.1%, and if analysts are right about their expectations for calendar 2015 earnings growth will be 12.43%.  That is represented by the first red dot in our earnings growth chart, while the second red dot represents 2016 estimates and shows earnings growth of 21.76% if analysts are right about what they think Honeywell will do in calendar 2016.

That brings our attention to the PE multiple, and in our PE multiple chart we can see that Honeywell currently trades with a PE multiple of 18.67, represented by the blue bar in our PE multiple chart.  If price remains the same and analysts are right about their estimates the multiple will decline to 16.99 by the end of 2015, represented by the first red bar, and then again to 15.34 if they are right about 2016 numbers as those are represented by the second red bar.

This allows us to turn our attention to the peg ratio and combine earnings growth with the PE multiple to better define fair value.  Represented by the blue dot in our peg ratio chart, the current peg ratio for Honeywell is 1.85.  Our definition of fair value is when a company trades with a peg ratio between 0 and 1.5, so at current levels the peg ratio for Honeywell looks extended and the company looks rich.

HON Honeywell PEG Ratio

However, if analysts are right about their estimates for 2015 and price remains the same the peg ratio will decline to 1.37, which is in our wheelhouse and represented by the first red dot in our peg ratio chart, and decline even further by the end of 2016 if analysts are right about that too, represented by the second red dot, which is 0.7.  If analysts are right and price remains the same the peg ratio will clearly improve as we work our way through calendar 2016.

So should price remain the same?

To answer this question we must focus on our technical observations and those tell us that Honeywell is likely to continue to move higher and test our defined longer-term resistance levels before turning down meaningfully.  As a result, we would expect higher levels from Honeywell before downside pressure becomes more meaningful and monitor longer-term resistance as that is defined in our real time trading report for sell signals. 

Watch the third parameter in the longer term column of our technical summary data for Honeywell specifically as that price will also change from time to time, and use that as an upside target respectively.  From there, we would expect the stock to fall back to support where again it could be considered a buy given the positive fundamentals that would exist at the end of 2015 going into 2016.