Is There A Better Pick Over Honeywell Stock?

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HON: Honeywell logo
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Honeywell

We believe that 3M stock (NYSE: MMM) is a better pick than Honeywell stock (NYSE: HON), given its attractive valuation. Honeywell is trading at a comparatively higher valuation of 4.2x trailing revenues vs. 2.0x for 3M, and we think that this gap in valuation should narrow in favor of 3M, given its superior revenue growth and profitability, as discussed below.

Looking at stock returns, Honeywell, with 1% returns this year, has fared better than 3M, down 31%, and the broader markets, with the S&P 500 index 19% lower. There is more to the comparison, and in the sections below, we discuss why we believe MMM stock will offer better returns than HON stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Honeywell vs. 3MWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Honeywell’s Revenue Growth Is Better

  • Both companies saw their revenue remain mostly flat over the last twelve month period.
  • However, if we look at a longer time frame, 3M has fared better, with its sales rising at an average rate of 2.7% to $35.4 billion in 2021, from $32.8 billion in 2018, while Honeywell saw its sales decline at an average rate of 6.0% to $34.4 billion in 2021, vs. $41.8 billion in 2018.
  • Honeywell has exposure to the Aerospace business, and with airlines being one of the worst-hit sectors during the pandemic, this has weighed on the company’s overall revenue growth since the beginning of the pandemic.
  • While this trend has now reversed and Honeywell is seeing a steady rise in sales for its Aerospace, Building Technologies, and Performance Materials business, lower demand for personal protective equipment weighs on its Safety & Productivity Solutions segment sales.
  • 3M’s revenue growth over the recent years was driven by high demand for safety and personal protective equipment, while sales for some of its other products, including office products, were hit during the pandemic due to many offices being shut, given the lockdowns and shelter-in-place restrictions, resulting in lower demand.
  • However, this trend has now reversed. 3M is facing a decline in demand for safety and protective gear, while its consumer business, including home improvement, saw a pickup in demand post-pandemic. But now, with the dollar appreciating meaningfully against most currencies, 3M is seeing lower sales due to foreign currency conversion.
  • Furthermore, 3M stock has been weighed down this year due to its exposure to earplugs lawsuits and concerns over slowing economic growth and its impact on 3M’s businesses.
  • Our Honeywell Revenue Comparison and 3M Revenue Comparison dashboards provide more details on the revenues.
  • The table below summarizes our revenue expectation for both companies over the next three years and points to a CAGR of 3.5% for Honeywell and 1.6% for 3M.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. 3M Is More Profitable But Comes With Higher Risk

  • 3M’s operating margin of 21.3% over the last twelve-month period is better than 18.6% for Honeywell.
  • This compares with 19.2% and 19.6% figures seen in 2019, before the pandemic, respectively.
  • 3M’s free cash flow margin of 19.2% is better than 15.9% for Honeywell.
  • Our Honeywell Operating Income Comparison and 3M Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Honeywell fares better. Its 12% debt as a percentage of equity is lower than 54% for 3M, while its 13% cash as a percentage of assets is higher than 7% for the latter, implying that Honeywell has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that 3M’s revenue growth is better, is more profitable, and is available at a comparatively lower valuation. On the other hand, Honeywell has a better debt position and more cash cushion.
  • Now, looking at prospects using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe 3M is currently the better choice of the two. The table below summarizes our revenue and return expectations for Honeywell and 3M over the next three years and points to an expected return of 14% for 3M over this period vs. a 2% expected return for Honeywell stock, implying that investors are better off buying MMM over HON, based on Trefis Machine Learning analysis – Honeywell vs. 3M – which also provides more details on how we arrive at these numbers.

While MMM stock looks like it will offer better growth than HON stock, it is helpful to see how Honeywell’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Teradata vs. Crane.

Despite higher inflation and the Fed raising interest rates, Honeywell stock has seen a 1% rise this year. But can it drop from here? See how low Honeywell stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
HON Return -4% 1% 89%
MMM Return -3% -31% -32%
S&P 500 Return -6% -19% 72%
Trefis Multi-Strategy Portfolio -5% -22% 215%

[1] Month-to-date and year-to-date as of 12/19/2022
[2] Cumulative total returns since the end of 2016

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