New Coverage Launch By Trefis: $107 Price Estimate For Honeywell International Inc. – Part 2

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Honeywell

In continuation with our previous article (Click here to read), we now move on to giving an overview of Honeywell’s HVAC, Safety & Security division and then discuss some important factors that impact its market share and margins.

Overview of Honeywell’s HVAC, Safety & Security division

Honeywell’s HVAC Safety & Security division refers to Honeywell’s reported segment, Automation & Control Solutions. This segment’s product portfolio includes heating, ventilation and air conditioning controls and displays, gas and fire detection systems, temperature and pressure measurement equipment, protective wear, surveillance equipment and scanning products such as bar code scanners and RFID tag readers. Earlier, Honeywell’s Automation & Control Solutions segment included its Honeywell Process Solutions business which dealt with process automation for industries such as petrochemicals. However, as a part of its realignment activity, Honeywell Process Solutions will now be a part of Honeywell’s Performance Materials and Technologies segment and should be completely integrated by 2018.

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The segment accounted for 34.5% of Honeywell’s revenues in 2013 [1] and forms 37.7% of our $106 price estimate for Honeywell. As per our calculations, the segment has an EBITDA (Earnings Before Interest, Depreciation And Amortization) of 16.5%, which is the lowest of Honeywell’s three divisions.

We have a price estimate of $107 for Honeywell, which is approximately 15% above its current market price.

Market share could increase driven by developing countries and multi-brand strategy

According to our calculations, Honeywell has a market share of 7.25% in the global HVAC, safety and security market. Honeywell’s market share had declined in the past two years primarily due to slower growth in revenue from Europe and U.S. than the industry. However, going forward, we believe that Honeywell’s market share could increase due to its focus on expansion in developing countries such as China and India. Additionally, a multi-brand strategy could also bolster its market share.

  • Sales of HVAC, safety and security products are highest in developed countries due to the high disposable incomes and standards of living. However, demand for these products is rising in developing countries as well, primarily due to the increase in urbanization and rising disposable incomes. Development of commercial spaces, such as offices, malls and airports are driving the demand for HVAC, safety and security products. Additionally, with rising per capita income in the developing countries, consumers are looking to spend on products that help make their lives comfortable and safe. This will also help drive demand for HVAC, safety and security products. In order to capture this demand growth, Honeywell has been offering products such as air cleaners, portable masks, water purifiers and packaging material in China that will help protect health and the environment. [2]
  • Honeywell follows a multi-brand strategy for its HVAC, safety and security products. Multi-brand strategy tries to achieve market penetration by offering similar products under different brand names. For example, for its gas detection products, Honeywell has the brands – Honeywell Analytics, RAE systems, BW Technologies, Lumidor, City Technologies and Manning. Though it may lead to cannibalization, it offers the benefit of 1)greater shelf space, leaving less room for competitors, 2)targets all price ranges and quality gaps, and 3)caters to consumers that regularly change brands. With a large number of brands, Honeywell will be able to increase its presence in the industry, which will help drive its market share.

Acquisition driven growth and cost synergies

Honeywell has been actively involved in enhancing its HVAC, Safety & Security portfolio through acquisitions. These acquisitions also offer cost synergies that will help drive the division’s comparatively low margins. This is one of the reasons why we believe that the division’s EBITDA will climb to 17.4% in the coming years.

  • In September 2013, Honeywell acquired Intermec, a manufacturer of wired and wireless automated identification and data collection solutions. The acquisition was made with the primary motive of adding scale that will help generate cost synergies driven by an increase in its scanning and mobile printing products. The acquisition is expected to generate a return on investment of 12% by 2018.
  • In April 2013, Honeywell acquired RAE Systems, a manufacturer of fixed and portable gas and radiation detections systems. The acquisition has enabled Honeywell to expand its global presence and increase its sales channels for its gas detection systems. The acquisition is expected to generate a return on investment of 18% by 2018.
  • In October 2012, Honeywell acquired Saia-Burgess Controls, a manufacturer of programmable controllers, touch-screen panels, electrical submeters, counters and timers for use in HVAC applications, energy management systems and machine and infrastructure controls. The acquisition of Saia-Burgess Controls will greatly help Honeywell in expanding its presence in high growth regions such as China.

(Read about Honeywell’s Process Solutions & Performance Materials in the third part of our article which will be published shortly. Please click here to read our article about Honeywell’s Aircraft & Automotive Components division.)

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Notes:
  1. Honeywell’s 2013 10-K SEC Filing, www.honeywell.com []
  2. Morgan Stanley China Industrials Summit Presentation, June 18, 2014, www.honeywell.com []