New Coverage Launch By Trefis: $107 Price Estimate For Honeywell International Inc. – Part 3

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In continuation with our previous two articles (Click here to read Part 1 and Part 2), we now move on to giving an overview of Honeywell’s Process Solutions & Performance Materials division and then discuss some important factors driving the division’s valuation and revenue.

Overview of Honeywell’s Process Solutions & Performance Materials division

Honeywell’s Process Solutions & Performance Materials division refers to Honeywell’s reported segment, Performance Materials & Technology and its Process Solutions business, whose revenues were earlier reported as a part of the Automation & Control Solutions segment. 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. Honeywell’s Process Solutions & Performance Materials division offers process automation services for industrial facilities. Process automation is used to automatically control a process in order to facilitate the desired outcome in the most efficient and safe manner. Honeywell offers software and instruments such as sensors, controllers, measuring and monitoring equipments as part of its process automation portfolio. The segment also manufactures specialty materials and chemicals such as hydrocarbon processing technologies, catalysts, adsorbents, fluorine products, specialty films and additives, advanced fibers and composites, intermediates, electronic materials and chemicals.

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The segment accounted for 25.2% of Honeywell’s revenues in 2013 [1] and forms 19.7 % of our $106 price estimate for Honeywell. As per our calculations, the segment has an EBITDA (Earnings Before Interest, Depreciation And Amortization) of 20.7%, which is the highest of Honeywell’s three divisions.

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

High capital expenditure is taking a toll on the division’s value

The point to note about Honeywell’s Process Solutions & Performance Materials division is that despite its significant revenue contribution and high EBITDA, the segment forms only 19.7% of our price estimate. The primary reason is the capital invested in the division. Over the past few years, the division’s capital expenditure has grown rapidly, almost doubling since 2010, overtaking the capital expenditure for the Aircraft & Automotive Components division.  The reduced cash flow due to the high capital expenditure has suppressed the value potential for the segment. Given Honeywell’s plans to further add capacity to the division, we believe that the capital expenditure will continue to rise and keep the division’s value suppressed. However, the high capital expenditure is actually a good thing, since it will help cater to the expected growth in the upstream and downstream oil & gas industry, which in turn will help drive revenue.

Growing oil & gas industry should help drive revenues

Honeywell’s Process Solutions & Performance Materials offers various process technologies, catalysts and adsorbents, equipment and services that cater to the needs of the upstream and downstream oil & gas industry. Process automation is very significant for these industries since the various processes involved in oil & gas production, and refining of petrochemicals require constant monitoring based upon which certain steps need to be taken. Honeywell provides the measuring equipment, sensors and controllers that are used to automatically collect data regarding pressure, temperature, liquid flow etc. and also the software that is required to analyze this data. Based upon the result of the analysis, process settings are automatically changed to achieve optimum production levels, thereby, helping increase efficiency and reducing costs. Because of this, oil & gas, petrochemicals and refining industries are increasingly adopting process automation solutions.

Since the oil & gas industry is one of the primary consumers for Honeywell’s Process Solutions & Performance Materials products and services, the division’s revenues are highly correlated to the growth and capital expenditure in the industry. Given the current trends in the industry, we believe that Honeywell’s Process Solutions & Performance Materials revenue should continue to grow over the Trefis forecast period.

  • Growing capital expenditure by Oil & Gas companies: Annual upstream capital expenditure by major oil and gas companies have increased sharply over the past few years. [2] Upstream capital expenditures are expected to remain elevated in the next few years because of existing project lineups. High capital expenditure by oil and gas companies bodes well for Honeywell due to its high exposure to the upstream oil & gas industry. In June 2013, Petrobras chose Honeywell to supply its UOP Separex membrane systems to process natural gas from Petrobras’ Lula pre-salt oil reserves. [3] 
  • Growing refinery capacity: The global refinery throughput levels in 2014 are expected to be higher than 2013 levels by one million barrels per day. [4] This is primarily due to the capacity additions in China and the Middle East. Honeywell has had some significant wins in the refining industry in these regions which should help drive growth in its revenues. In September 2014, Honeywell announced that Shandong Shouguang Luqing Petrochemical Co. Ltd. will use its UOP C4 Oleflex process technology to produce isobutylene, a key ingredient for making high-octane fuel and synthetic rubber. [5] In July 2014, Petrixo Oil & Gas selected Honeywell’s UOP Renewable Jet Fuel process technology to produce renewable jet fuel and diesel at their new refinery in United Arab Emirates. [6] 
  • Growing Chinese petrochemical industry: China is the world’s largest petrochemical market, accounting for 25% of the global consumption in 2011. Because of its significant processing capacity, it is also expected to be the fastest growing market, growing at an average rate of 6.7% through 2018. [7] Honeywell has considerable exposure to the Chinese petrochemical industry which should help in capitalizing on the industry’s growth.

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Notes:
  1. Honeywell’s 2013 10-K SEC Filing, www.honeywell.com []
  2. Global upstream oil and gas spending continues to favor exploration and development , April 25, 2014, www.eia.gov []
  3. Honeywell’s UOP Technology Selected By Petrobras For Offshore Natural Gas Processing In Brazil, June 6, 2013, www.honeywell.com []
  4. Global Refining Throughput Levels to Increase by One Million Barrels Per Day in 2014, says GlobalData, June 18, 2014, www.globaldata.com []
  5. Honeywell’s UOP Oleflex™ Technology Selected To Help Meet Growing Fuel And Petrochemical Demand In China, September 11,2014, www.honeywell.com []
  6. Honeywell’s UOP Green Fuels Technology Selected By Petrixo To Produce Renewable Jet Fuel And Diesel, July 9, 2014, www.honeywell.com []
  7. Petrochemicals Market is Expected to Reach USD 791.05 Billion in 2018, July 22, 2014, www.prweb.com []