Back about a year and a half ago, I told you about a tech leader that would allow you to “laugh at the next big selloff.”
And, well, since then, the market has been no joke. In fact, it’s been absolutely turbulent – including last month’s big sell-off.
The Standard & Poor’s 500 Index is down by roughly 5% so far this year — while the tech stock I recommend back then is at breakeven. That means its shares have crushed the overall market by some 35% since I first recommended it.
And now Wall Street is waking up to the incredible value in this diversified tech play.
Indeed, The Wall Street Journal ran a story Sept. 2 touting one of the main points I made to you some 18 months ago – that this company is one of the nation’s top M&A engines.
Still the “Leader of the Pack”
When I first recommended it March 14, 2014, I was one of the first tech analysts to note that Honeywell International Inc. (NYSE: HON) boasts a very impressive M&A team, led by Chief Executive David Cote.
I listed its acquiring nature as a catalyst for the stock and a prime reason to invest. “When it comes to the tech sector’s version of ‘Let’s Make a Deal,’ Honeywell intends to be the ‘Leader of the Pack’ in this realm,” I said at the time.
The company had recently disclosed it had amassed a $10 billion war chest for filling out the franchise through 2018.
That was more than twice the amount it had spent on M&A in the five years leading up to that point. And with just that that dynamic in place, the stock skyrocketed 290% from March 2009 to March 2014 and outpaced the S&P 500 by nearly 86% at the time.
On top of that, Honeywell vowed to spend up to $5 billion buying back its own shares, which would drive up its earnings-per-share (EPS) number and stock value, ultimately attracting more investors.
So shareholders are in favor of Honeywell’s shopping sprees. They want to see the company continue making these big acquisitions and diversifying its offerings. But they want to see it done at little to no risk.
That was my point 18 months ago – and out almost exactly the same argument The Wall Street Journal made in its recent story.
In other words, Honeywell meets something of an inverse of Rule No. 2 of Your Tech Wealth Blueprint. That rule says to “Separate the signal from the noise.” To create real wealth, you have to ignore the hype you get from companies but also the noise you hear on Wall Street.
However, in this case there was no “noise” from the Street – analysts had yet to put the Honeywell puzzle pieces together.
But that’s changing, starting with the Journal‘s recent flattering profile.
Basically, the Journal story shows why Honeywell remains happily – and profitably – out of step with the rest of the tech industry.
In an Acquiring Mood
While other big-cap players like General Electric Co. (NYSE: GE) and United Technologies Corp. (NYSE: UTX) are spinning off units or selling them to other firms, it’s full steam ahead for M&As at Honeywell.
Honeywell has completed 84 acquisitions in the last 13 years. These buyouts tacked on an extra $12 billion in annual sales and brought the Morristown, N.J.-based company’s portfolio up to 65 major brands.
And the numbers prove investors are on board with Honeywell’s tactics. The company’s shares opened at $99.64 today, up 205.2% from the day Cote took over in 2002.
“The question is whether Honeywell can keep the act going,” Journal reporter Ted Mann wrote. “Small, disciplined deals… are no longer enough to make a meaningful difference in growth at a company with $40 billion in revenue last year.”
I believe Honeywell can keep going. In late July, the company announced a $5.1 billion deal to acquire the Elster Group, a maker of water, electricity and gas meters, from the U.K.’s Melrose Industries PLC.
It’s a clever move because connected “smart” meters like the ones made by Elster are being installed in new homes and businesses wherever they’re being built around the globe – and plenty of other folks are upgrading.
The company predicts the Elster acquisition will add at least $2 billion in annual sales and improve its operating margins by 20%. Expected to close in the first quarter of 2016, this will be Honeywell’s largest purchase since Cote began his stint as CEO.
Not only that, but it’s the largest transaction associated with the company since 1999’s $15 billion AlliedSignal-Honeywell merger, which laid the basis for the company’s current operations and growth plans.
Growing Inside, Too
Meantime, it’s worth noting that Honeywell’s aerospace and defense businesses also are growing steadily.
The company released an investors’ report Sept. 9 forecasting aerospace sales alone to grow 13% to 25% to a range of $17.8 billion to $19.7 billion by 2019.
That’s in part because Honeywell is leading the “connected aircraft” revolution, a market it estimates at $8.2 billion. That figure includes connected aircraft hardware, software, apps, data services and airtime services that link to next-generation satellites.
With the company’s aggressive M&A strategy firmly in place, investors ought to expect some big Honeywell purchases in the months ahead that will add even more sales for the aerospace segment, not to mention its overall tech offerings.
Honeywell has proven that a savvy acquirer can continue to add meaningful value for shareholders.
Over the past five years, Honeywell has returned roughly 127% to investors, beating the S&P’s return in the period by 72%. And it’s also paid out a 2% dividend.
Trading at $99.64, Honeywell has a market cap of $77.71 billion. Operating margins are 15.79%, and return on equity is 23.96%.
Those numbers tell us that this is a well-run aviation-tech giant that continues to find new ways to add more value for its shareholders
And that makes yet another a great foundational play with which you can continue making your comeback from the recent sell-off. This is a stock you can hold for the long haul – no matter what the markets throw your way.
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