Honeywell (HON) Last Update 10/28/21
Related: CAT BA LMT GLW
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Honeywell
$248.01
Yours
Trefis Price
N/A
$205
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Honeywell Company

VALUATION HIGHLIGHTS

  1. Aircraft & Automotive Components constitute 41% of the Trefis price estimate for Honeywell's stock.
  2. Building & Safety Products constitute 31% of the Trefis price estimate for Honeywell's stock.
  3. Process Solutions & Performance Materials constitute 28% of the Trefis price estimate for Honeywell's stock.

WHAT HAS CHANGED?

  1. Impact of Coronavirus On Honeywell Stock

Honeywell stock lost more than 42% – dropping from $180 at the beginning of 2020 to below $105 in late March 2020 – then spiked over 2x to around $216 now (through Oct 27, 2021). That means it is well above the pre-pandemic levels.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound with economies opening up gradually given the large scale vaccination programs being undertaken by several countries. This will bode well for Honeywell.

  1. Q3 2021 Performance
Honeywell reported its Q3 2021 results with revenue of $8.5 billion, up 9% y-o-y, led by an 18% growth in safety & productivity solutions. This can be attributed to a continued demand for personal protective equipment (PPE). All other segments, including aerospace, also saw y-o-y growth. Its adjusted earnings per share of $2.02 grew 29% y-o-y, due to a rebound in margins. The company has also revised its full-year 2021 guidance with revenue now estimated to be $34.4 billions and EPS of $8.05 (at mid-point of their range), compared to its previous guidance of 34.9 billion and $8.02, respectively.

  1. Spin off of Businesses
In its bid to move away from consumer and distribution facing businesses, Honeywell spun off its homes and ADI Global Distribution business, which included residential thermostats and security and fire-protection products, and generated annual revenue of $2.5 billion. The transportation business, a portion of the company’s current aerospace unit that primarily serves the auto industry, and focus on turbocharger technologies and generate annual revenue of $3 billion.

BUSINESS SUMMARY

Honeywell International Inc. (Honeywell) is a diversified technology and manufacturing company. It offers aircraft engines, avionics and other related products and services; control, sensing and security technologies for commercial and residential use; automotive turbochargers, specialty chemicals, electronic and advanced materials; process technology for refining and petrochemical industry; and heating, ventilation and air conditioning products and solutions for homes and businesses.

The company has a global presence and generates 41% of its net sales from outside the U.S.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

  • Aerospace EBITDA Margin: Honeywell's Aerospace EBITDA Margin has improved consistently from 17% in 2009 to 27% in 2020, primarily due to higher sales of aircraft engines and equipment to the commercial aircraft market, and turbochargers to the automobile market. This scale up has, in turn, reduced the average costs significantly. Implementation of the Honeywell Operating System has also enabled margin improvement due to efficient utilization of resources. If Honeywell's sales to the U.S defense sector increases, it would add to its present production volume and lead to further improvement in margins. Should this occur, and margins exceed 35% versus our forecast of around 28% by the end of the Trefis forecast period, there could be a potential upside of nearly 10% to the current price estimate.

SOURCES OF VALUE

We consider Honeywell's Aircraft Engines, Avionics, Transportation Systems & Others division to be a major source of value for the company because of the following reasons:

Innovative products enable Honeywell to strengthen its position in the market

Honeywell's high research and development expenditure enables it to consistently introduce new and innovative products for the aerospace industry. Such products help increase efficiency of the aircraft and also make it easier to operate. These products continually see high demand since airline manufacturers prefer to equip their new aircraft and upgrade their old ones with the most advanced engines and equipment.

Strong position in the commercial aircraft market

Honeywell has been a strong player in the commercial aircraft market, supplying to major commercial aircraft such as Airbus A320 and Boeing 737 Max. With the commercial aircraft market expected to grow by 36,770 aircraft in the next 20 years, Honeywell should be able to derive strong growth in value from its exposure to this market.

With the grounding of the 737-Max, we expect there to be a marginal decline in revenue attained from Boeing until 2020.

Market leading position in Turbochargers

Turbochargers are gaining popularity in vehicles since they help in increasing vehicle performance and reducing fuel consumption and vehicle weight. Since Honeywell is one of the leading manufacturers of turbochargers, it has seen significant growth in its revenue due to the rise in demand for turbochargers.

KEY TRENDS

Covid-19 Impact

As Covid-19 has resulted in restrictions on businesses, as well as movement of people, the global economy has seen a significant slowdown, and it has impacted the revenue for companies, such as Honeywell. With rapid contraction of air travel, the company’s aerospace business has taken a hit. The air travel and Honeywell's Aerospace segment sales are expected to see a rebound as the Covid-19 crisis winds down.

Expansion and replacement of fleet will drive growth in the aircraft industry

Airlines are presently involved in expanding their fleet size in order to support the growing demand for air travel. Additionally, airlines are replacing their old aircraft with new ones that are equipped with more advanced technologies and more efficient engines in order to save up on fuel costs. Because of these trends, Boeing estimates that around 36,770 new airplanes, amounting to $5.2 trillion, will be delivered over the next 20 years. (Link) This provides a huge opportunity for aircraft parts and engines that are manufactured by Honeywell.

That said, over the past few quarters, airline orders have slowed down considerably due to a slump in the market. However, as seen by the orders whipped up by Boeing and Airbus, the trend reversal is already here. We expect 2018 to be very bright for the airline industry as a whole.

Growth in HVAC sales driven by developing markets

The Asia-Pacific region constituted the largest market for HVAC equipment in 2020 and is expected to grow at a strong pace driving the global HVAC market to $277 billion in 2025, compared to $202 billion in 2020. (Link)

Developing markets such as China, India, and Indonesia will be the fastest growing markets in Asia due to the rapid economic growth, greater product availability, and high demand for cooling systems, which will drive sales of HVAC equipment in these countries. While business has slowed down in China, we expect the slump to be temporary.