# Honeywell International Inc. (HON) | Present Value of Free Cash Flow to Equity (FCFE)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company's asset base.

## Intrinsic Stock Value (Valuation Summery)

Honeywell International Inc., free cash flow to equity (FCFE) forecast

USD \$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 15.54%
01 FCFE0 2,562
1 FCFE1 2,921  = 2,562 × (1 + 14.02%) 2,528
2 FCFE2 3,309  = 2,921 × (1 + 13.27%) 2,479
3 FCFE3 3,723  = 3,309 × (1 + 12.53%) 2,414
4 FCFE4 4,162  = 3,723 × (1 + 11.79%) 2,336
5 FCFE5 4,622  = 4,162 × (1 + 11.04%) 2,245
5 Terminal value (TV5) 114,174  = 4,622 × (1 + 11.04%) ÷ (15.54% – 11.04%) 55,459
Intrinsic value of 's common stock 67,461

Intrinsic value of 's common stock (per share) \$86.07
Current share price \$80.75

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

## Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.77% Expected rate of return on market portfolio2 E(RM) 13.09% Systematic risk (β) of 's common stock βHON 1.24 Required rate of return on 's common stock3 rHON 15.54%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rHON = RF + βHON [E(RM) – RF]
= 2.77% + 1.24 [13.09% – 2.77%]
= 15.54%

## FCFE Growth Rate (g)

### FCFE growth rate (g) implied by PRAT model

Honeywell International Inc., PRAT model

Average Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in millions)
Dividends paid on common stock   1,210  1,081  948  916  815
Net income attributable to Honeywell   2,926  2,067  2,022  2,153  2,792
Net sales   37,665  36,529  33,370  30,908  36,556
Total assets   41,853  39,808  37,834  36,004  35,490
Total Honeywell shareowners' equity   12,975  10,806  10,666  8,844  7,187
Ratios
Retention rate1   0.59 0.48 0.53 0.57 0.71
Profit margin2   7.77% 5.66% 6.06% 6.97% 7.64%
Asset turnover3   0.90 0.92 0.88 0.86 1.03
Financial leverage4   3.23 3.68 3.55 4.07 4.94
Averages
Retention rate 0.58
Profit margin 6.82%
Asset turnover 0.92
Financial leverage 3.89

Growth rate of FCFE (g)5 14.02%

2012 Calculations

1 Retention rate = (Net income attributable to Honeywell – Dividends paid on common stock) ÷ Net income attributable to Honeywell
= (2,926 – 1,210) ÷ 2,926 = 0.59

2 Profit margin = 100 × Net income attributable to Honeywell ÷ Net sales
= 100 × 2,926 ÷ 37,665 = 7.77%

3 Asset turnover = Net sales ÷ Total assets
= 37,665 ÷ 41,853 = 0.90

4 Financial leverage = Total assets ÷ Total Honeywell shareowners' equity
= 41,853 ÷ 12,975 = 3.23

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.58 × 6.82% × 0.92 × 3.89 = 14.02%

### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (63,291 × 15.54% – 2,562) ÷ (63,291 + 2,562) = 11.04%

where:
Equity market value0 = current market value of 's common stock (USD \$ in millions)
FCFE0 = last year 's free cash flow to equity (USD \$ in millions)
r = required rate of return on 's common stock

### FCFE growth rate (g) forecast

Honeywell International Inc., H-model

Year Value gt
1 g1 14.02%
2 g2 13.27%
3 g3 12.53%
4 g4 11.79%
5 and thereafter g5 11.04%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 14.02% + (11.04% – 14.02%) × (2 – 1) ÷ (5 – 1) = 13.27%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.02% + (11.04% – 14.02%) × (3 – 1) ÷ (5 – 1) = 12.53%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.02% + (11.04% – 14.02%) × (4 – 1) ÷ (5 – 1) = 11.79%