Honeywell International Inc. (NYSE:HON) shares are up more than 32.12% this year and recently increased 0.35% or $0.53 to settle at $153.59. Dover Corporation (NYSE:DOV), on the other hand, is up 28.05% year to date as of 12/05/2017. It currently trades at $96.23 and has returned -0.59% during the past week.
Honeywell International Inc. (NYSE:HON) and Dover Corporation (NYSE:DOV) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect HON to grow earnings at a 8.37% annual rate over the next 5 years. Comparatively, DOV is expected to grow at a 15.00% annual rate. All else equal, DOV’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 26.51% for Dover Corporation (DOV). HON’s ROI is 13.80% while DOV has a ROI of 8.50%. The interpretation is that HON’s business generates a higher return on investment than DOV’s.
Cash is king when it comes to investing. HON’s free cash flow (“FCF”) per share for the trailing twelve months was +0.89. Comparatively, DOV’s free cash flow per share was +0.86. On a percent-of-sales basis, HON’s free cash flow was 1.73% while DOV converted 1.97% of its revenues into cash flow. This means that, for a given level of sales, DOV is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. HON has a current ratio of 1.40 compared to 1.30 for DOV. 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 0.81 for DOV. DOV is therefore the more solvent of the two companies, and has lower financial risk.
HON trades at a forward P/E of 19.65, a P/B of 5.54, and a P/S of 2.94, compared to a forward P/E of 21.10, a P/B of 3.50, and a P/S of 1.97 for DOV. HON is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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 -1.02% to its one-year price target of 155.18. Comparatively, DOV is 2.37% relative to its price target of 94.00. 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 1.70 for HON and 2.50 for DOV, which implies that analysts are more bullish on the outlook for DOV.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. HON has a beta of 0.97 and DOV’s beta is 1.28. HON’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. HON has a short ratio of 3.29 compared to a short interest of 2.73 for DOV. This implies that the market is currently less bearish on the outlook for DOV.
Honeywell International Inc. (NYSE:HON) beats Dover Corporation (NYSE:DOV) on a total of 8 of the 14 factors compared between the two stocks. HON generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. HON is more undervalued relative to its price target.