Lehman Brothers and Citi both report that Honeywell’s (HON) exposure to U.S. airlines is minimal and that the recent sell-off is unwarranted. Potential areas to offset the lost sales to airlines include exposure to energy infrastructure investments and energy efficiency product, which account for about ~33% of HON’s revenue. Both banks positively rate the stock and see HON going to $70.
We view the recent weakness as an opportunity, and think the strong guidance for 2008 could still prove conservative.
We estimate Honeywell’s commercial aerospace aftermarket exposure to domestic capacity cuts by legacy U.S. carriers represents <2% of total sales. We also estimate that a 5%-15% reduction in domestic flying hours by these carriers would only reduce 2008 EPS by $0.01-$0.03, and we see other areas of potential upside to offset.
We don’t expect other travel markets to be unscathed by global slowing and high fuel prices and as a result have long modelled decelerating revenue growth in HON’s Aero segment.
Trading at about 12X estimated 2008 FCF the stock is exceptionally cheap and is not being properly valued for the dramatic improvement in earnings quality over the last few years.
HON’s is generating strong cash flow and has been proactively absorbing “pay as you go” restructuring to prepare for softer global growth. HON’s high earnings quality, margin upside and cash deployment opportunities give us high confidence in our estimates.
Lehman maintains OVERWEIGHT, target price $70.
Citi reiterates BUY, target price of $70.
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