Is The Market Pricing Honeywell Fairly?

Honeywell International (NYSE: HON) had a pretty great 2017. The company started the year off strong, and kept that momentum running throughout the year. While stagnant growth at Aerospace hurt the company’s top line, business at other segments helped offset the losses without much of a problem. Honeywell’s results throughout the year were buoyed by strategic investments, greater operational efficiencies, and stronger demand in most key markets. Further, this momentum seems to have spilled into 2018 as well, with the latest quarter recording  financial improvements across the company.

Despite this, however, the conglomerate’s continuous restructuring activities are yet to show any signs of overall stabilization in many of its major end markets. For this reason, we believe that the market is overvaluing the stock at the moment by about 5%. To further drive this point home, we have created an interactive dashboard analysis laying down our valuation method and reasoning.

In general, Honeywell earns most of its revenues from four major segments: Aerospace, Home & Building Technologies (HBT), Performance Materials & Technologies (PMT), and Safety & Productivity Solutions (SPS). We expect all segments to help the company improve financials throughout the year.

The Aerospace business has struggled quite a bit in the last few quarters. However, in the latest quarter, the segment seems to have finally turned the corner. On an organic basis, revenues at aerospace grew by almost 8% in Q1. In general, it benefited from increased demand for commercial jet components; the steady increase in global air traffic has enabled both Boeing and Airbus to capitalize on their healthy backlogs. Further, management also mentioned that there are signs of recovery in demand for business jets as the overall global economy seems to stabilize, while oil prices rise.

In 2017, the Safety and Productivity Solutions (SPS) business became the company’s top performing segment thanks to the acquisition of Intelligrated – a leading supply chain company. It drove more than a whopping 30% of the growth at SPS. In addition, orders and backlog at the business grew at a modest pace throughout the year.

This momentum seems to have spilled into 2018 as well, with the division recording a high single digit growth in Q1. We expect the segment to continue to benefit from increased demand and synergies over the remainder of the year.

Like Aerospace, Performance Materials & Technologies (PMT) also saw revenues remain quite stagnant in 2017. However, over the past few months, things seem to have stabilized at the segment, with Q1 numbers projecting a reversal in the trend. The segment managed to post a high single digit increase in revenues, and management expects the business to improve over 2018.

Lastly, at Home & Building Technologies (HBT), with a improving economy, and consequently increased construction activity the world over, especially in emerging markets like India and China, we expect to see revenues at the business to increase over the year consistently.

As one can see from the analysis above, Honeywell seems poised for good growth through 2018. That said, we believe that the market may have overvalued the stock in the near term.