If you like Honeywell International's (NYSE: HON) prospects of hitting its guidance in 2016, then don't miss the chance to buy the stock, because it's a lot cheaper than many people might think. The aerospace, controls, and materials company represents a good value in the industrial sector. Here's why.
Honeywell's underlying cash flow
In a nutshell, Honeywell International's underlying free cash flow, or FCF, generation is a lot stronger than it looks. Why is this important? Simply put, because FCF (operating cash flow minus capital expenditures) is money a company can use to pay dividends, make buybacks, or secure earnings-enhancing acquisitions.
In Honeywell's case, the company is in the middle of a five-year plan (2014 to 2018) intended to generate 4% to 6% sales growth per annum, with margin expansion helping generate double-digit earnings growth along the way. However, growth plans usually require investment, and Honeywell's capital expenditures are eating into its cash flow.
One way to look at it is to consider capital expenditures compared to depreciation. Normally, you'd want a company to have higher capital expenditures than depreciation, because it's usually a good idea for companies to grow, but as you can see, in recent years, Honeywell has significantly increased capital expenditures in order to fuel future growth.
Honeywell's underlying cash flow
In a nutshell, Honeywell International's underlying free cash flow, or FCF, generation is a lot stronger than it looks. Why is this important? Simply put, because FCF (operating cash flow minus capital expenditures) is money a company can use to pay dividends, make buybacks, or secure earnings-enhancing acquisitions.
In Honeywell's case, the company is in the middle of a five-year plan (2014 to 2018) intended to generate 4% to 6% sales growth per annum, with margin expansion helping generate double-digit earnings growth along the way. However, growth plans usually require investment, and Honeywell's capital expenditures are eating into its cash flow.
One way to look at it is to consider capital expenditures compared to depreciation. Normally, you'd want a company to have higher capital expenditures than depreciation, because it's usually a good idea for companies to grow, but as you can see, in recent years, Honeywell has significantly increased capital expenditures in order to fuel future growth.
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