Option Trade
Honeywell International Inc. (NYSE:HON) Calls
Wednesday, January 25, 2017

** OPTION TRADE: Buy the HON MARCH 17 2017 120.000 call at approximately $1.70. Place a pre-determined sell at $3.50.

Note: No protective stop losses added -- but if you wish to do so make it $0.70.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey

Wednesday, January 25, 2017

Honeywell International Inc. (NYSE:HON), a diversified technology and manufacturing company, is set to announce its 4Q16 earnings on January 27, 2017, before the market opens.

The company projects 2017 earnings in the range of $6.85-$7.10 per share, while revenues are anticipated to be down 1% to up 2% year over year. For fourth-quarter 2016, the company anticipates earnings of $1.74 per share, which is at the lower end of its previously guided range of $1.74-$1.78.

In 3Q16, when Honeywell made a downward revision to its earnings per share by ten cents to $1.60, the stock reacted sharply and lost nearly 7.5%. Since then HON has recovered from the fall. Now with HON reaffirming its 4Q16 earnings guidance to be at $1.74, analysts are upbeat about the stock for the upcoming quarter. Further, Honeywell provided earnings per share guidance of $6.85 to $7.10 for fiscal 2017. As a result, many analysts have made an upward revision of HON’s 12-month target price.

In order to counter the muted growth environment and improve its profitability, Honeywell further intends to initiate stringent cost-cutting efforts, while improving its product portfolio with opportune acquisitions and strategic divestures.

The company has put additional focus on software engineering with nearly 11,000 engineers working on software instead of more classic industrial goods. The software business is better as it enables more combinations of services and drives higher margins. Honeywell certainly has some solid ground for future growth.

Honeywell has been in rally mode since bottoming in the second half of 2016 -- and now, an ascending triangle setup points to another up-leg in shares. For Honeywell, the big breakout level to watch is resistance up at $118.50.

The $118.50 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $118.50 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.

Honeywell International stock’s 50 day moving average is $116.83 and its 200 day moving average is $114.71. The company has a market capitalization of $89.48 billion, a PE ratio of 18.37 and a beta of 0.95. Honeywell International has a 1-year low of $96.32 and a 1-year high of $120.02.

Factors to Consider

HON recently launched Centurion, a composite fabric indigenously designed to develop lightweight apparel and equipment to particularly cater to the demanding job requirements of law enforcement officers. The fabric is made from Honeywell Spectra fiber, which is reportedly known as one of the world's strongest and lightest manmade fibers. It is perfectly suited for any sort of application where the product needs to be strong yet lightweight.

With such technologically-advanced products, Honeywell aims to improve its revenues in the future.

The company projects 2017 earnings in the range of $6.85-$7.10 per share, while revenues are anticipated to be down 1% to up 2% year over year. For fourth-quarter 2016, the company anticipates earnings of $1.74 per share, which is at the lower end of its previously guided range of $1.74-$1.78.

In order to counter the muted growth environment and improve its profitability, Honeywell further intends to initiate stringent cost-cutting efforts, while improving its product portfolio with opportune acquisitions and strategic divestures.

Honeywell is coming out of a period of elevated capital expenditures -- being made to generate future growth -- which has eaten into FCF generation. For example, the company's reinvestment ratio (capital expenditure over depreciation) is forecast to average around 1.6 in 2014-2016, when management believes a ratio of 1.2 is more normal.

However, capital expenditure is set to fall in the coming years, and the spending reductions, alongside earnings increases, will boost FCF generation. Management expects capital expenditure in the range of $1 billion to $1.1 billion for 2016 but sees it falling to the $800 million range in 2018. In other words, FCF is likely to increase by at least a few hundred million in the next couple of years, making Honeywell an attractive stock for investors who like cash flow.

Management had announced last year that the dividend payout ratio will increase in the upcoming 4 years. In 2015, the dividend payment increase was of 15% and 11.76% in 2016.

Rothschild Investment Corp added to the holdings in Honeywell International Inc. by 291.90%. The purchase prices were between $105.78 and $118.09, with an estimated average price of $112.57. The stock is now traded at around $117.34. The impact to the portfolio due to this purchase was 0.77%. The holdings were 67,371 shares as of 2016-12-31.

Analysts Opinions

Honeywell International Inc.‘s stock had its “outperform” rating reaffirmed by Robert W. Baird in a report released last Friday. They presently have a $132.00 price target on the stock. Robert W. Baird’s price target would indicate a potential upside of 12.43% from the stock’s current price.

Also, on January 5, 2017, Deutsche Bank (DB) rated Honeywell as a “buy” and increased its price target to $137, which implies a 12-month potential return of 16.3% over the January 20 closing price of $117.82.

HON has been the subject of several other research reports…..

  • Argus reiterated a “buy” rating on shares of Honeywell International in a research note on Wednesday, October 12th.
  • Zacks Investment Research upgraded shares of Honeywell International from a “sell” rating to a “hold” rating in a research report on Friday, October 28th.
  •  Jefferies Group restated a “buy” rating and issued a $133.00 target price (up from $130.00) on shares of Honeywell International in a research report on Monday, December 19th.
  • Barclays PLC set a $128.00 target price on shares of Honeywell International and gave the company a “buy” rating in a research report on Wednesday, October 12th.
  • Finally, Oppenheimer Holdings Inc. restated an “outperform” rating and issued a $134.00 target price (up from $122.00) on shares of Honeywell International in a research report on Tuesday, December 20th.

Honeywell International Inc. has earned a consensus recommendation of “Buy” from the twenty ratings firms that are currently covering the stock. One analyst has rated the stock with a sell recommendation, two have given a hold recommendation and sixteen have issued a buy recommendation on the company. The average 12 month price objective among brokerages that have issued a report on the stock in the last year is $125.59.

Harvey’s Options Volatility Indicator

Conclusion

Honeywell has made impressive efforts to improve their internal practices over the past 15 years after failing to merge with General Electrics (GE). Those efforts paid well as the company operating margins improved from 7.6% in 2004 to 15.2% in 2014. Those impressive margin increase lead HON EPS to increase by 10% in 2015 as the company is facing a challenging economy. The company was also able to increase its dividend by 10% CAGR over the past 5 years. HON is a leader in the aerospace control and safety systems and should benefit from its leadership position during the commercial aircraft up-cycle.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the HON MARCH 17 2017 120.000 call at approximately $1.70. Place a pre-determined sell at $3.50.

Note: No protective stop losses added -- but if you wish to do so make it $0.70.

”Success is simple. Do what's right, the right way, at the right time.”

 Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.

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