How Does Honeywell Compare With Raytheon?

Honeywell’s stock (NYSE:HON) is up by around 35% in the last three years. That’s great for Honeywell. But wait a minute, Raytheon’s stock is down 25% during the same period. This, despite the fact that Raytheon’s revenue growth for the 2016-2019 period stood at 35%, compared to 7% decline for Honeywell. While Honeywell’s profit margins (net income as a percentage of sales), are higher at 17% versus 7% for Raytheon, and it partly explains the difference in Honeywell’s stock when compared to Raytheon, Honeywell’s valuation is richer with its P/E at 17x based on its current market price and FY’19 EPS, while Raytheon’s is 10x. So does this make Raytheon the better bet compared to Honeywell? Our analysis, ‘Honeywell vs. Raytheon: Does the stock price movement make sense?‘, has more underlying numbers, parts of which are summarized below.

How Do The Core Businesses For Honeywell And Raytheon Compare?

Let’s look at the core business prospects a bit more closely. Raytheon and Honeywell both have significant commercial aviation exposure. It is possible that Q2 earnings for both the companies paint a grim picture. The Covid-19 crisis has significantly impacted the commercial airlines industry, and this will have repercussions on Raytheon and Honeywell’s commercial OEM and aftermarket sales. Some of the airlines are barely able to survive, let alone expand. Air travel is unlikely to see a V-shaped recovery and this means fewer orders for new aircraft in the near term. Raytheon’s overall restructuring, that included United Technologies merger with Raytheon Company, and de-consolidation of OTIS and Carrier businesses, have resulted in an increased focus on its aerospace and defense businesses, which are likely to be impacted more in the current Covid-19 led downturn. In fact, Raytheon stock is trending lower this year, while the de-consolidated OTIS and Carrier have seen their stock prices surge since their listing in March. 

Honeywell, on the other hand, is more diversified with only 38% of its sales coming from the Aerospace segment. In fact, some of Honeywell’s products, such as masks and personal protection equipment, are seeing stronger sales in the current environment. That said, Raytheon’s largest business, defense, may have negligible impact from the crisis with its massive backlog. The U.S. government has thus far not announced any cuts in defense spending, which should provide some support for Raytheon. 

Overall, Raytheon’s much lower valuation multiple compared to both its own historical multiple as well as to Honeywell’s make a strong case for its stock. That said, it is still a riskier investment compared to Honeywell, given its dependency on the aerospace business. The Covid-19 crisis has thus far not led to defense budget cuts, but it could be a reality going forward, as the Covid-19 pandemic has forced governments to focus their spending on healthcare and safeguarding the economy. While Honeywell stock looks expensive, the company’s well-diversified businesses, better and fast-improving profitability, should provide investors better downside protection.

Honeywell has seen a strong run, with its stock up 60% while sales are down 7%, and another defense company, AeroVironment has been riding high with 50% price gains over the recent weeks, but what’s next for it?  While Raytheon’s stock looks undervalued, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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