Buy Honeywell for a Stealth Play on Smart Homes

by Charles Sizemore | June 13, 2014 12:24 pm

Buy Honeywell for a Stealth Play on Smart Homes

The age of the smart home has arrived. And one of the biggest beneficiaries is a stodgy old tech name you’d probably never think of: Honeywell International (HON[1]). That’s right, the diversified manufacturer of everything from jet engines to refrigerator parts.

Google (GOOG[2]) made a big splash into the smart home market with its high-profile purchase of Nest, the maker of the Nest Learning Thermostat[3] that actually observes your daily schedule and adjusts the air conditioning accordingly. But Honeywell has been quietly carving out a large market share in the wifi-enabled smart thermostat market and, at this early stage, appears to be emerging as the early standard bearer.

Summers are hot here in Dallas, so I thought I would join the ranks of those homeowners using smart thermostats to keep their electric bill tolerably low. Plus, I found the idea of controlling my air conditioner from my phone to be irresistible. But given that they start in the low $100s and can push $500, I decided to sweat it with my existing “dumb” thermostat, at least for now.

But Honeywell’s latest offering has given me reason to reconsider.

Honeywell’s new Lyric thermostat takes Nest’s adaptability to a whole new level. By communicating with your smartphone, the Lyric detect when you are approaching your house and adjust the temperature accordingly. This geofence will have two settings[4]: a 7-mile radius appropriate for those who live in the suburbs and a 500-foot radius for those that live in an urban setting.

Honeywell is no Johnny-come-lately to the smart home market. My home security system, which is monitored by market leader ADT Corp (ADT[5]), was manufactured by Honeywell. And Honeywell has a website dedicated to its home automation products[6], which include everything from programmed mini blinds to ceiling fans on a smartphone-controlled timer. Honeywell even produces smart locks that enable you to open your front door remotely from your phone or computer.

And not to be relegated to the home, Honeywell announced earlier this quarter that it would be teaming up with AT&T (T[7]) to muscle in on Gogo’s (GOGO[8]) turf in provided fast in-flight wifi in airplanes.

So, is Honeywell a buy?

Yes, though not necessarily for the reasons you might think. Keep in mind that Honeywell’s smart-home products still contribute only a small amount to its top line. Its entire “automation and control solutions” unit, of which the smart-home products are a part, accounted for 42% of sales last quarter.

I prefer to think of Honeywell as a reasonably-priced industrial stock with a nice embedded growth option in the form of its smart products. HON stock trades hands at 19 times trailing earnings and 15 times expected forward earnings. That’s in line with 22 and 15, respectively, at rival General Electric (GE)[9]. But aside from a brief spell in the early 2000s, Honeywell has consistently sported a higher return on equity.

chart Buy Honeywell for a Stealth Play on Smart Homes

Honeywell also pays a modest but respectable dividend of 1.9%, and it has consistently raised its dividend since 2005. In fact, Honeywell has more than doubled its dividend over that period, and this is a cyclical industrial stock we’re talking about.

Will you double your money in Honeywell over the next year? Probably not. But in an expensive market where value is getting harder and harder to find, I would expect HON to outpace the S&P 500 by a wide margin over the next several years.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. Other than owning an expensive ADT security system to protect his wife and children from roving bands of outlaws scouring the Texas countryside, he holds no positions in any of the stocks listed.

Endnotes:
  1. HON: /stock-quotes/HON-stock-quote/
  2. GOOG: /stock-quotes/GOOG-stock-quote/
  3. Nest Learning Thermostat: https://nest.com/thermostat/life-with-nest-thermostat/
  4. This geofence will have two settings: http://wallstcheatsheet.com/technology/apple-and-honeywell-take-on-nest-with-a-smart-thermostat.html/?ref=YF
  5. ADT: /stock-quotes/ADT-stock-quote/
  6. website dedicated to its home automation products: http://homesecurity.honeywell.com/home_automation.html
  7. T: /stock-quotes/T-stock-quote/
  8. GOGO: /stock-quotes/GOGO-stock-quote/
  9. GE): /stock-quotes/GE)-stock-quote/

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