VALUATION HIGHLIGHTS

1. Aircraft & Automotive Components constitute 43% of the Trefis price estimate for Honeywell's stock.
2. Building & Safety Products constitute 30% of the Trefis price estimate for Honeywell's stock.
3. Process Solutions & Performance Materials constitute 27% of the Trefis price estimate for Honeywell's stock.

WHAT HAS CHANGED?

1. HON Stock Performance

HON stock has seen little change, moving slightly from levels of $215 in early January 2021 to around $200 now (end of February 2024) vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

Overall, the performance of HON stock with respect to the index has been quite volatile. Returns for the stock were -2% in 2021, 3% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that HON underperformed the S&P in 2021 and 2023.

2. Q4 2023 Performance

Honeywell reported its Q4 2023 results with revenue of $9.4 billion, up 3% y-o-y, led by a 15% rise in Aerospace, and a 6% rise in Performance Materials, while Building Technologies sales were down 1% and Safety & Productivity segment sales fell 24%.

The company's adjusted earnings per share of $2.60 was 3% above the $2.52 figure seen in the prior-year quarter. The company has also provided its full-year 2024 outlook with revenue estimated to be around $38.5 billion and EPS of $9.95 (at the mid-point of their range).

3. 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. It then spiked 90% to $200 now (through late February 2024). That means it is now trading slightly 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.

However, higher inflation and the Fed raising interest rates have resulted in slowing economic growth. This may impact Honeywell's business and stock in the near term.

4. Spin off of Businesses

In its bid to move away from the consumer and distribution-facing businesses, Honeywell, in 2018, 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, which used to be a portion of the company's aerospace unit, used to serve the auto industry primarily, focused on turbocharger technologies, generating an 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 the 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 40% of its net sales from outside the U.S.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

• Aerospace EBITDA Margin: Honeywell's Aerospace EBITDA Margin improved consistently from 24% in 2017 to 29% in 2022, primarily due to higher sales of aircraft engines and equipment to the commercial aircraft 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 the efficient utilization of resources. If Honeywell's sales to the U.S. defense sector increase, it would add to its present production volume and lead to further improvement in margins. Should this occur, and margins exceed 38% versus our forecast of around 33% by the end of the Trefis forecast period, there could be a potential upside of over 5% 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 major commercial aircraft such as Airbus A320 and Boeing 737 Max. With the commercial aircraft market expected to grow at a steady pace in the next 20 years, Honeywell should be able to derive strong growth from its exposure to this market.

With the grounding of the 737-Max, there was a marginal decline in revenue attained from Boeing in recent years. However, Boeing has now resumed the production of this aircraft.

KEY TRENDS

Covid-19 Impact

As Covid-19 has resulted in restrictions on businesses and the movement of people, resulting in a significant slowdown in the global economy in 2020. This has adversely impacted the revenue growth of several companies, including Honeywell. With the rapid contraction of air travel, the company's aerospace business has taken a hit. However, 2021 marked the beginning of the recovery cycle. The air travel and Honeywell's Aerospace segment sales are expected to continue to see strong demand in the coming years.

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 on fuel costs. Because of these trends, Boeing estimates that around 37,000 new airplanes, amounting to $5 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, airline orders slowed down considerably due to a slump in the market during the pandemic. However, as seen by the orders placed with Boeing and Airbus, the trend reversal is already here. We expect 2023 to be 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 recent years 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.