What’s Happening With Honeywell Stock?

[Updated: 5/26/2021] Honeywell Update

Honeywell Stock (NYSE: HON) has seen a large 54% move over the last one year, outperforming the broader markets, with the S&P500 rising 40% over the same period. The outperformance can partly be attributed to better than estimated results over the recent quarters, and expectations of a quicker rebound in demand for Honeywell’s products, given the swift pace of Covid-19 vaccination in the U.S.

Of late, there have been a few positive developments for the company, which will likely bolster the stock price growth. Earlier this week, Honeywell announced a new partnership with Denso, a Japan-based automotive components manufacturer, to develop electric propulsion engine systems for aircraft. The aim is to design an engine that can help take-off and landing from a platform, like a helicopter, but fly like an airplane, with a focus on the urban air mobility segment to cater to air taxis and delivery vehicles. Honeywell expects to complete its first design for testing within a year. If the company is successful with this engine, and it is also able to secure the regulatory approvals, it will result in a revolutionary change for air transportation.

Honeywell currently manufactures engines, electronic and mechanical systems for aircraft, but that business has been hit in the Covid-19 pandemic, with segment sales down 18% y-o-y in 2020. However, now with large-scale vaccination programs underway in several countries, the air travel industry is expected to rebound over the coming quarters, and this should bode well for Honeywell’s business.

In a separate development, Honeywell, along with SAP, launched connected building solutions to improve on their existing offerings. Earlier in Feb 2020, Honeywell introduced Honeywell Forge, a cloud-based machine learning implementation for buildings. The application not only collects data about a building’s operations, but also makes auto-adjustments to save energy. With the latest release, the application now includes access to data for building operations costs, providing customers with the means to optimize building performance, while it relies on artificial intelligence to enable automated operations. What makes this development important is the expansion of the smart buildings market, which is expected to grow in low double-digits annually over the next few years, and Honeywell is one of the largest players, along with Johnson Controls and Schneider Electric.

Although there are multiple positive developments for Honeywell, we continue to believe that the stock has only a little room left for growth, going by our Honeywell Valuation based on expected adjusted EPS of $8.00 for full year 2021 and a P/E multiple of 29x. As such, it will be prudent for investors to wait for a dip to enter into HON stock for better gains.

[Updated: 3/19/2021] HON Stock Fully Valued

Honeywell Stock (NYSE: HON) looks fully valued at current levels of $215, as it has gained 2x from the levels it was at on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks an outperformance compared to the S&P which has moved 75% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. This outperformance can partly be attributed to better than expected quarterly performance in Q3 and Q4, as well as an increased expectation of strong earnings growth by investors. Looking at a longer time period, HON stock is up 63% from levels of around $132 seen toward the end of 2018.

Much of the 63% rise of the last 2 years or so can be attributed to the expansion of the P/E multiple, while earnings have actually declined. Honeywell’s total revenue declined 22% to $32.6 billion in 2020, as compared to $41.8 billion in 2018. The decline in revenue can be attributed to the pandemic as well as divestiture of its transportation systems business. Also, the company saw a 160 bps contraction of its net margins from 16.2% in 2018 to 14.6% in 2020, resulting in a 22% drop in net income from $6.8 billion to $4.8 billion over the same period. The company’s total shares saw a decline of 2% over the same period, and on a per share basis, earnings dropped 20% to $6.79 in 2020, as compared to $9.10 in 2018. Despite the lackluster performance over the recent years, Honeywell’s P/E multiple has expanded, and it will likely see a drop from the current levels. Our dashboard, ‘What Factors Drove 63% Change In Honeywell Stock between 2018 and now?‘, has the underlying numbers.

Honeywell’s P/E multiple expanded over 2x from 14.5 in 2018 to 31.3 in 2020, based on trailing EPS. While the company’s P/E is at around 32 now, it compares with levels of 14x in 2018, and 20x as recently as late 2019.

Outlook

Honeywell has seen a significant impact on its Aerospace business during the pandemic. A decline in overall passenger air travel  and cuts in capital spending by the airlines has meant lower revenues for Honeywell’s original equipment as well as aftermarket business. Investors, though, have been optimistic about this business as the economies open up gradually in 2021. Looking at the latest quarter, Honeywell reported a 19% y-o-y drop in Aerospace revenues, a trend which may take a while to reverse, in our view. Note that Aerospace is the largest segment for Honeywell, accounting for 38% and 35% of its total sales in 2019 and 2020, respectively. For Honeywell, its Safety & Productivity Solutions business came to the rescue in 2020, with increased demand for masks and PPE driving the segment sales higher (by 6% for the full year). Now, the decline in 2020 sales was expected for several businesses, and Honeywell was no exception with its exposure to Aerospace, which by the way, is also the most profitable segment for the company. While Honeywell will see sales growth as the Covid-19 crisis winds down, the overall revenue is estimated to reach just $36.6 billion by 2022, a little short of $36.7 billion levels seen in 2019. That said, the margins are expected to expand, resulting in a stronger earnings growth over the next couple of years. Given it will take a couple of years for Honeywell to bring its business back to pre-Covid levels, the sharp rise in its P/E multiple looks overdone, and we believe that the stock may be vulnerable to downside risk.