We think that Honeywell stock (NYSE: HON) currently is a better pick compared to Rockwell Automation stock (NYSE: ROK), despite Rockwell’s revenue growing at a faster pace over the recent years. Honeywell trades at about 4.4x trailing revenues, compared to 5.1x for Rockwell. Although both the companies saw a decline in revenue due to the pandemic, Rockwell has seen a sharp recovery aided by new orders and impact of ASEM, Kalypso, and Fiix acquisitions. Honeywell, on the other hand, is still seeing slower revenue growth, primarily due to its exposure to the aerospace segment, which was one of the worst hit businesses during the pandemic. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Honeywell vs Rockwell: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Rockwell’s Revenue Growth Has Been Stronger
Now, Rockwell’s revenue growth has been better than Honeywell’s for both the last twelve months period as well as over the last three years. While Rockwell’s revenue growth has been bolstered by multiple acquisitions, Honeywell’s Aerospace business has led to a large fall in revenues during the pandemic, and it has also divested some of its businesses, including transportation systems, that has impacted its revenue growth over the last three years. Honeywell’s -7% CAGR for the last three-year period compares with a 0.1% CAGR for Rockwell. Similarly, Rockwell’s 4.2% revenue growth over the last twelve months period is much better than -1.6% change for Honeywell.
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However, now that the vaccination rate is on a rise, and economies are gradually opening up, Honeywell is also seeing a recovery in demand for its aerospace business. Looking forward, Honeywell’s revenues are estimated to grow 8% y-o-y to over $35 billion in 2021, while Rockwell will likely see 12% top-line growth to $7.1 billion for full-fiscal 2021. Rockwell is now seeing a strong demand for its warehouse automation as well as software business, with all the segments seeing double-digit sales growth in Q3. For Honeywell, its safety and productivity solutions segment has outperformed its other businesses during the pandemic, with increased demand for warehouse solutions as well as safety and retail products. The segment revenues surged 35% in Q2, while they were up 42% for the first half of 2021. This trend is expected to continue in the near term. Our Honeywell Revenues dashboard provides more insight on the company’s revenues.
2. Honeywell Has Seen Better Margin Growth
Unlike the pattern seen in revenue growth, Honeywell’s operating margin growth of 1.4% over the last three year period is better than -2.6% change for Rockwell. However, if we were to look at last twelve month period, operating margin is similar for both the companies at around 18%. Honeywell’s operating margin of 17.9% over the last twelve month period compares with 18.7% in 2019, before the pandemic. The current operating margin of 18.3% for Rockwell is a tad higher compared to Honeywell, and it compares with the 20.4% figure in 2019. Overall, for both the companies, margins have contracted, but the decline was higher for Rockwell. We expect margins for both companies to pick up going forward, driven by increased sales.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for aerospace is likely to rise going forward, boding well for Honeywell. For Rockwell, continued demand for warehouse automation, among other offerings, is likely to bolster its revenue growth going forward. Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in the U.S. are higher than what they were a few months back.
That said, Honeywell has seen better margin expansion over the last year or so and it also remains close to the margins the company saw before the pandemic. Honeywell’s current valuation is also more attractive than that of Rockwell, with HON stock trading at about 4.4x trailing revenues, versus 5.1x for Rockwell. If we were to look at financial risk, Rockwell’s 5.9% debt as a percentage of its equity is much lower than 13.0% for Honeywell, but Honeywell’s 19% cash as percentage of assets is better than the 11% figure for Rockwell, implying that Honeywell has a higher debt load but better cash position.
Overall, it appears that Honeywell is a better pick among the two stocks, with cheaper valuation, high profit growth, and no extra risk. Going by our Honeywell Valuation of $241 per share, based on adjusted EPS of $8.05, and a P/E multiple of 30x, there is over 12% upside potential from its current levels of $216.