Recent Honeywell Selloff Provides An Entry Point

Argus’ John Eade believes the recent selloff in Honeywell International Inc. HON shares offers a buying opportunity as the company is poised to generate low double-digit earnings growth over the next five years.

Shares have underperformed the S&P 500 over the past quarter, dropping 9.6 percent while the S&P 500 has risen 1.4 percent. Over the past year, shares have now underperformed the market, with a gain of 5.6 percent, compared to the market’s advance of 7.4 percent.

Related Link: Morgan Stanley Cuts Target On Honeywell, Keeps As A Top Pick

The selloff was mainly driven by the company’s lowering of its EPS guidance on the adoption of a new accounting standard, and weakness in certain business segments. Honeywell cut its 2016 EPS guidance modestly, to $6.60-$6.64 from $6.60-$6.70, but the shares dropped 10 percent.

“We believe that Honeywell will continue to benefit from its diverse product lines and relatively low exposure to U.S. defense spending, as well as from its strong presence in the commercial aerospace and construction markets,” Eade wrote in a note.

Eade noted that the company is able to generate growth in China by selling “mid-market” products despite the Asian country’s infrastructure slowdown. The company’s balance sheet is strong and management has a history of double-digit dividend hikes.

However, Eade cut his 2016 EPS estimate to $6.63 from $6.68 and trimmed 2017 forecast to $7.29 from $7.32 on weakness in the business jet and commercial helicopter segments.

However, the analyst maintained his Buy rating on the shares.

“Blending our approaches, we arrive at a fair value of $130 per share, implying a slight valuation premium to peers, for this well-managed and highly profitable company,” the analyst added.

At time of writing, shares of Honeywell fell 1.20 percent to $105.52.