All's Well with Honeywell

NEW YORK (TheStreet)-Readers of my articles know that I'm becoming more obsessed with quality companies with good track records that are shareholder friendly.

Honeywell ( HON) is a Fortune 100 company that invents and manufactures technologies to address some of the world's toughest challenges.

Those challenges are tied to global macro trends such as energy efficiency, clean energy generation, safety and security, globalization and customer productivity. That alone has my attention!

With approximately 132,000 employees worldwide, including more than 22,000 engineers and scientists, HON has a potent focus on its performance, quality, delivery, value and technology.

HON has caught the eyes and captured the hearts of investors both big and small. That's part of the reasons why it hit a 52-week high of $81.65 on July 9.

Another reason has to do with being in the right business at the right time. You see, HON makes and sells airplane parts, which is the main driver of its aerospace segment. Airlines are either ordering a lot of new planes this year or updating the planes already in service.

This is good news for a company like Honeywell. It's also helping to drive up the share price of companies like Boeing ( BA). BA hit a 52-week high of $105.65 on July 9, as well.

Boeing is basking in the light of a record backlog of nearly $324 billion in its commercial airplanes division. It saw year-over-year quarterly earnings growth in the first quarter of nearly 20%. On July 24, when the company makes its next quarterly report, analysts are estimating a 23% increase.

Honeywell is benefiting from BA's earnings leadership in aerospace; HON derives about a third of its earnings from its own aerospace activities. It reports its second quarter financial numbers July 19.

Keep in mind HON also derives about 43% of revenue from its automation and controls business. This segment should continue to thrive, with the boom in home building and the push for energy efficiency in existing building of all genres.

As TheStreet's research department recently noted, "Under the leadership of CEO Dave Cote, the company has restructured, sold noncore assets and implemented 'six sigma' quality-control processes throughout the organization.

"It has reinvested in product research and development and expanded its global footprint and is positioned well to benefit from the replacement cycle in aerospace and autos and after-market growth, the global energy refining cycle, energy-efficiency initiatives and stronger market-share growth in turbochargers."

That's quite a mouthful of good news. With the restructuring and HON's exposure to these profitable industries there are plenty of reasons to anticipate upside in revenue, margins and cash flow.

The one-year chart can help us visualize the success that HON has experienced and the effect that success has had on its share price. HON Chart HON data by YCharts

By examining HON's return on invested capital, which rose through the first quarter of 2013 to nearly 15% and comparing it to the very important trailing 12-month (TTM) revenue per share, which has been in modest decline, we may be viewing an opportunity unfolding before our very eyes.

After its stellar stock price performance is it possible that HON is ready to be shorted by the hedge funds and other short sellers? After all, the share price is ominously close to the consensus analysts' one-year price target of just above $82.

This is not a shout-out to short the stock. Yet the time to do so is when companies like HON and BA have hit new highs during the slower, more correction-oriented months of July through October.

With earnings season in full bloom and HON approaching the earnings confessional let's watch and see what happens. The dividend yield on HON is currently 2%. That doesn't make "buying-and-holding" a compelling theme, especially when the 10-year Treasury yield is 2.62% state-tax-free.

Another concern worth mentioning is that both HON and BA are selling at rich multiples to earnings. The current PE ratio for both is above 20 and the forward (1-year) is close to 15 times earnings.

Analysts are not anticipating HON to shoot out the lights when it reports second-quarter EPS and revenue numbers. The consensus estimate for EPS is 6%, and less than 3% for sales growth and revenue.

HON hasn't had a good, old-fashioned correction since November 2012, when shares temporarily fell 8.5%. Since then the average pullback has been less than 5%.

Past performance is no guarantee of what may lay ahead. Yet it can indicate the kind of correction a stock is capable of experiencing.

So ask yourself, would you rather own HON at $82 or at $75? If you could buy shares at $75, you'd be giving yourself a price dividend of 8.5%, plus the dividend yield-to-price would be nearly 2.2%.

Those who are sitting on a nice profit in HON stock may want to consider taking half off the table with that very consideration in mind. HON shares are up about 30% since the beginning of 2013.

At the very least if you have a nice profit on HON or BA, consider using a stealth trailing stop loss to protect your gains.

At the time of publication the author is neither long nor short shares of any stock mentioned in this article.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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