This Healthcare Company Is A Better Pick Over Honeywell Stock

HON: Honeywell logo

We think that Thermo Fisher Scientific stock (NYSE: TMO) currently is a better pick compared to Honeywell stock stock (NYSE: HON), despite it being the more expensive of the two, trading at 6.7x trailing revenues compared to 4.1x for Honeywell. Even if we were to look at the P/EBIT ratio, TMO stock appears to be more expensively priced with 25x P/EBIT ratio, compared to 22x for HON stock. This gap in valuation can be attributed to Thermo Fisher Scientific’s better revenue growth and higher profitability, a trend likely to continue going forward as well, as we discuss in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Honeywell vs Thermo Fisher Scientific: Which Stock Is A Better Bet? Parts of the analysis are summarized below. We compare these two companies given that they have similar revenue bases.

1. Thermo Fisher Scientific’s Revenue Growth Is Stronger

  • Both companies managed to see sales growth post the pandemic, but Thermo Fisher Scientific has witnessed much faster and more consistent revenue growth over the years. Thermo Fisher Scientific’s sales have jumped from $18.3 billion in 2016 to $39.1 billion over the last twelve months, while Honeywell’s revenues have declined from $39.3 billion to $34.6 billion over the same period, partly due to divestiture of its transportation business, which garnered close to $3 billion in annual sales till 2018.
  • The recent rise in Thermo Fisher Scientific’s revenue can be attributed to an increase in sales of Covid-19 testing and treatment products. The sales growth is aided by continued market share gains for its instruments. Note that once the instruments are installed, it also generates recurring revenue in the form of after sales service and it also results in demand for consumables.
  • Looking at Honeywell, it has exposure to the Aerospace business, with airlines being one of the worst hit sectors during the pandemic, and this has weighed on the company’s overall performance since the beginning of the pandemic. Despite the lower sales for Aerospace, the company has posted overall revenue growth so far this year, led by gains across its other segments – Building Technologies, Performance Materials, and Safety & Productivity Solutions. Our Honeywell Revenues dashboard provides more details on the company’s segments.
  • Now, Thermo Fisher Scientific’s revenue growth of 37% over the last twelve month period is much better than just 4.2% growth for Honeywell. Looking at a slightly longer time frame, Thermo Fisher Scientific has outperformed Honeywell with its last three-year revenue CAGR of 16%, compared to -7% for Honeywell.
  • Looking forward, with economies now opening up, the demand for air travel will rise post pandemic, and the airlines will have more cushion to spend on new aircraft, boding well for Honeywell.
  • That said, Thermo Fisher Scientific’s revenue is expected to grow at a faster pace compared to Honeywell. The table below summarizes our revenue expectation for HON and TMO over the next three years, and points to a CAGR of 11.3% for Thermo Fisher Scientific, compared to a CAGR of 3.6% for Honeywell.
  • Note that we have different methodologies for companies negatively impacted by Covid, and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to pre-Covid revenue run rate, and beyond the recovery point, we apply average annual growth observed in the three years prior to Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider average annual growth prior to Covid with certain weight to growth during Covid and the last twelve months.

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2. Thermo Fisher Scientific Is More Profitable

  • Thermo Fisher Scientific’s operating margin of 27% over the last twelve month period is better than 18% for Honeywell.
  • Even if we were to look at the recent margin growth, Thermo Fisher Scientific stands ahead, with last twelve month vs last three year margin change at 8%, compared to just 1% for Honeywell.
  • We estimate Honeywell’s valuation to be around $248 per share which is 15% above the current market price of $216. This represents a P/EBITDA multiple of 20x for the company based on our forecast for Honeywell’s EBITDA for the current fiscal year.

3. The Net of It All

  • We see that the revenue growth over the recent quarters has been better for Thermo Fisher Scientific and it is also more profitable. However, Honeywell is trading at a comparatively lower valuation.
  • Looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe TMO is currently the better choice of the two. The table below summarizes our revenue and return expectation for HON and TMO over the next three years, and points to an expected return of -3% for HON over this period vs. a good 19% expected returns for TMO, implying that investors are better off buying TMO over HON, based on our dashboard – Honeywell vs Thermo Fisher Scientific – which also provides more details on how we arrive at these numbers.
  • Note that Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants, and infections in many geographies, including the U.S. and Europe, are higher than what they were a few months back. The concerns around Omicron have spooked the markets at large. If this recent large spike in Covid-19 cases from the new variant that we are witnessing now, results in any disruption in economic growth, it is likely to impact the sales growth of several companies, including Honeywell.

While TMO stock may outperform HON, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs. Qorvo.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
YTD [1]
Total [2]
HON Return 4% 4% 95%
TMO Return -7% -7% 340%
S&P 500 Return N/A% -1% 111%
Trefis MS Portfolio Return -4% -4% 276%

[1] Month-to-date and year-to-date as of 1/11/2022
[2] Cumulative total returns since the end of 2016

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