Honeywell Stock Likely To Trade Lower After Q4 Results

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Honeywell

[Updated 1/28/2021] Honeywell Update

Honeywell International (NYSE: HON) recently announced divestiture of its performance and lifestyle footwear business to Rocky Brands for a sum of $230 million. This business was part of Honeywell’s Safety & Productivity Solutions segment, and it included brands – The Original Muck Boot Company, XTRATUF fishing boots and deck shoes, Ranger, NEOS overshoes, and Servus protective rubber boots. The company deems these brands non-core to its business, and the deal is expected to close in Q1 2021. Safety & Productivity Solutions segment has been resilient compared to Honeywell’s other businesses thus far through the pandemic. Its sales were down just 1% for the nine month period ending September 2020, compared to a 13% drop in company-wide revenues. This can be attributed to the strong growth in personal protective equipment, offsetting most of the sales decline for other products.

HON stock will be in focus this week, as it will announce its Q4 results on Friday, January 29. We expect Honeywell to report mixed results with revenues estimated to be $8.3 Bil, slightly below the $8.4 Bil consensus estimates, while the adjusted earnings to be $2.00 per share, in-line with the consensus estimate. Honeywell is expected to benefit from a rebound in economic activities, though the Aerospace segment will continue to see lower sales in the near term, due to the impact of the pandemic on the overall airlines industry globally. Moreover, our forecast indicates that Honeywell’s valuation is around $184 per share, which is 8% below the current market price of around $199. Our interactive dashboard analysis on Honeywell’s Pre-Earnings has additional details.

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[Updated 11/17/2020] Buy Or Sell Honeywell Stock

Honeywell stock (NYSE: HON) is up 16% since the start of the year and it has gained 2x from its March lows. Honeywell faces downside risk as the company’s revenues in the last two quarters have declined by 17%. The ongoing Covid-19 crisis and the economic uncertainty has hit the company’s Aerospace business. This is likely to impact the revenue growth rate of the company – leading to a drop in the stock price.

Following a large 2x rise since the March 23 lows of this year, at the current price near $205 per share, we believe HON stock has reached its near term potential. HON stock has rallied from $104 to $208 off the recent bottom compared to the S&P which moved 62% over the same time period. Better than expected Q3 earnings and higher demand for the company’s safety products  has helped the stock in beating overall markets. Moreover, the stock is up 58% from levels seen in early 2019, over a year ago. HON stock has fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, and it is now 15% above the pre-Covid highs. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year. Our dashboard ‘Buy Or Sell Honeywell Stock’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last year is justified based on the company’s fundamentals. While Honeywell’s revenues have declined 12.2% from $41.8 billion in 2018 to $36.7 billion in 2019, this can primarily be attributed to the spin-off of its turbochargers and home solutions businesses. Excluding these businesses, sales were actually up 4%. The company’s Net Margins expanded from 3.4% from 16.2% to 16.7% over the same period. On a GAAP basis, lower revenues clubbed with margin expansion has meant earnings falling 9.2% from $6.8 billion to $6.1 billion. Overall, earnings on a per-share basis declined by 6% as shares outstanding decreased by 3% due to repurchases.

Finally, Honeywell’s P/E ratio expanded from 14x in 2017 to 21x in 2019. While the company’s P/E has now increased to 24x, it seems to be trading much higher compared to the levels seen over the recent years, P/E of 14x in 2018, and P/E of 21x as recently as late 2019. We believe there is a possible downside risk for Honeywell’s multiple, and the stock is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting Honeywell Stock?

The global spread of coronavirus has affected industrial and economic activity across the world, including Honeywell, as demand for its Aerospace products and services has declined. This resulted in Honeywell taking a hit when the pandemic started. That said, now with economies gradually opening up, there has been an increase in demand for Honeywell’s products. For Q3 though, total revenues were down 14.2% to $7.8 billion while earnings declined 52% to $1.08 per share, driven by margin contraction due to higher COGS.

Diving into the individual segments, Aerospace saw the largest impact with sales down 25% to $2.7 billion, due to lower air travel impacting the demand from original equipment manufacturers as well as lower aftermarket business demand. Aerospace segment is expected to remain weak in the near term, and the company has guided for total sales decline in the range of 11% to 14% in Q4. This leads us to believe that the stock is currently overvalued. In fact, overall revenues for the full year 2020 are estimated to decline 12% to a little over $32 billion, while earnings are estimated to be $7.03 on a per share and adjusted basis, much lower than the $8.16 figure reported in 2019. Not only is the impact on revenues and earnings high when compared to the previous year, the recent rally in the stock has meant an expensive valuation multiple for HON stock, making it vulnerable to downside risk. At the current price near $205, HON stock is trading at 29x its 2020 expected EPS of $7.03, compared to levels of 21x seen in 2019, making it vulnerable to downside risk.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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