Honeywell International Inc. (NYSE:HON) shares are up more than 33.04% this year and recently increased 0.12% or $0.18 to settle at $154.13. Danaher Corporation (NYSE:DHR), on the other hand, is up 20.20% year to date as of 12/27/2017. It currently trades at $93.56 and has returned -1.12% during the past week.
Honeywell International Inc. (NYSE:HON) and Danaher Corporation (NYSE:DHR) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect HON to grow earnings at a 8.22% annual rate over the next 5 years. Comparatively, DHR is expected to grow at a 8.21% annual rate. All else equal, HON’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 23.22% for Danaher Corporation (DHR). HON’s ROI is 13.80% while DHR has a ROI of 6.00%. The interpretation is that HON’s business generates a higher return on investment than DHR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. HON’s free cash flow (“FCF”) per share for the trailing twelve months was +0.89. Comparatively, DHR’s free cash flow per share was +1.18. On a percent-of-sales basis, HON’s free cash flow was 1.71% while DHR converted 4.86% of its revenues into cash flow. This means that, for a given level of sales, DHR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HON has a current ratio of 1.40 compared to 1.40 for DHR. This means that HON can more easily cover its most immediate liabilities over the next twelve months. HON’s debt-to-equity ratio is 0.80 versus a D/E of 0.43 for DHR. HON is therefore the more solvent of the two companies, and has lower financial risk.
HON trades at a forward P/E of 19.84, a P/B of 5.57, and a P/S of 2.94, compared to a forward P/E of 21.58, a P/B of 2.57, and a P/S of 3.66 for DHR. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. HON is currently priced at a -6.9% to its one-year price target of 165.56. Comparatively, DHR is -5.81% relative to its price target of 99.33. This suggests that HON is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for HON and 1.80 for DHR, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. HON has a beta of 0.98 and DHR’s beta is 1.03. HON’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. HON has a short ratio of 3.58 compared to a short interest of 2.25 for DHR. This implies that the market is currently less bearish on the outlook for DHR.
Honeywell International Inc. (NYSE:HON) beats Danaher Corporation (NYSE:DHR) on a total of 7 of the 14 factors compared between the two stocks. HON is growing fastly, generates a higher return on investment and higher liquidity. In terms of valuation, HON is the cheaper of the two stocks on an earnings and sales basis, HON is more undervalued relative to its price target. Finally, NI has better sentiment signals based on short interest.