A Recession Could Take Honeywell Stock Below $100?

Despite a 23% decline in Honeywell’s (NYSE: HON) stock since the beginning of the year, at the current price of around $135, Honeywell’s stock could see a significant downside, due to the impact of the coronavirus and oil price war crisis. Honeywell’s stock is still 7% lower than what it was since the start of 2018, a little over two years ago. Our dashboard, ‘Honeywell Downside: How Low Can Honeywell International Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

Honeywell’s stock was doing well till the beginning of this year, and it was up 18% between early 2018 and early 2020. This growth was led by an EPS growth of 14% (2017-19) and P/E multiple expansion from 20x to 21x over the same period. The company posted strong 21% revenue growth in its aviation business between 2017 and 2019. The company in March guided for 3% organic revenue growth and 5% EPS growth in 2020. Though the situation on the ground has drastically changed since then, with the outbreak of COVID-19 outside of China to the rest of the world, primarily the U.S. becoming the epicenter of the crisis. We believe Honeywell, in line with other industrial companies, will likely face a challenging 2020.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have a significant impact on Honeywell’s business, due to an overall decline in the aviation sector and uncertainties on global travel. Honeywell’s exposure to the aerospace segment is huge with sales of products from aircraft propulsion engines to aircraft wheels and brakes, along with software for engine controls and navigation, as well as servicing. Aerospace segment was the biggest driver for Honeywell over the recent years, and it also accounts for over half of the company’s total profits, and now with several cities across the globe on lockdown, the global passenger air travel has seen massive decline. Moreover, even after the lockdown restrictions will be eased, it is unlikely for passenger air travel to come back to full swing in the near term. This can be attributed to unavailability of a cure or vaccine for the treatment of COVID-19. While there are several pharmaceutical companies working to develop vaccines for COVID-19, it could take 10-12 months for them to be commercially available, which will likely translate into people avoiding non-essential travel.

This will have major repercussions on airlines, and in turn, the companies that manufacture aircraft hardware and software, such as Honeywell, due to postponement or cancellations of orders. Beyond aerospace, Honeywell is also exposed to the building solutions business. Now real estate is another sector that could see a significant impact due to the economic impact of the current pandemic. The global economy is feared to go into recession, and this will likely impact commercial real estate as well, thus resulting in lower sales for Honeywell’s building solutions segment. On the positive side, the company’s safety products are seeing high demand in the current crisis. The company has ramped up the production of N95 masks, among other protective gear. Though we don’t think this business growth will be enough to offset the decline expected in other segments.

As such, we consider a scenario for 2020, with investors revising their expectations for the full-year revenue to be closer to $31.4 billion, about 5% lower than its comparable 2017 revenue of $32.9 billion, and 14% lower than the 2019 revenue of $36.7 billion. The market isn’t going to stomach this well, and this is reflected in Honeywell’s current P/E multiple of 16.6x, which is 19% lower than the 20.4x level seen toward the end of 2017. This would mean a double whammy of 27% lower earnings and a 20% lower P/E multiple, translating into Honeywell’s price drop of 27%, to about $99 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

While many companies are focused on making masks in the current crisis, 3M may be a better bet when you compare Honeywell to 3M.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here.

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