After over a 13% fall year-to-date, at the current levels, we believe Honeywell stock (NYSE: HON) has more room for growth. HON stock fell from $207 in early January to $180 now. The YTD -13% return for HON marks an outperformance with -22% returns for the broader S&P500 index.
Looking at the longer term, HON stock is up 37% from levels seen in late 2018. This marks an outperformance compared to some of its peers and the broader markets, with General Electric stock rising 9%, 3M stock down 32%, and the S&P 500 index rising 51% over the same period. Our dashboard – Why Honeywell (HON) Stock Moved – provides more details on the factors behind this move over the last three years.
This 37% rise for HON stock over the last three years was driven by: 1. the company’s P/S ratio, which grew 67% to 3.6x currently, from 2.2x in 2018, and 2. an 8% decline in its shares outstanding to 683 million from 743 million in 2018. This was partly offset by 3. Honeywell’s revenue, which fell 18% to $34 billion currently, compared to $42 billion in 2018. This has meant that the company’s revenue per share fell 12% to $49.71 from $56.23.
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The revenue decline can primarily be attributed to the impact of the Covid-19 pandemic on the company’s businesses, especially Aerospace, given that commercial airlines was one of the worst-hit sectors during the coronavirus crisis, which has weighed on the company’s overall performance since the beginning of the pandemic. The company’s spin-off of its turbocharger and HVAC businesses also impacted the revenue growth. Adjusting for the above businesses, the sales would have been down only 2%.
Now with the worst of the pandemic likely behind us, the economies have seen a recovery, and airlines are benefiting from a rebound in travel demand. This should result in an uptick in the company’s Aerospace business over the coming years. As of Q1 2022, the commercial aviation original equipment and aftermarket sales were up a solid 23% y-o-y. The company’s newer businesses, including Quantinuum, will likely add over $2.0 billion to Honeywell’s top line by 2026. Honeywell’s management has provided long-term revenue growth (organic) guidance of 4% to 7%. With a favorable pricing environment and a rebound in demand for its products, we expect Honeywell’s operating margins to expand further after a 200 bps rise between 2018 and 2021. Our Honeywell’s Operating Income dashboard has more details.
While the company has strong prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. That said, we estimate Honeywell’s valuation to be $232 per share, reflecting a 29% upside from its current market price of $180, implying that investors may be better off using the recent dip to enter HON stock for gains in the long run. Our valuation is based on a forward P/E ratio of 27x based on our earnings forecast of $8.62 on a per share and adjusted basis for full-year 2022. This compares with an average of 25x seen over the last three years.
While HON stock has more room for growth, 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 how counter-intuitive the stock valuation is for Honeywell vs. Amkor Technology.
|S&P 500 Return||0%||-22%||84%|
|Trefis Multi-Strategy Portfolio||-9%||-26%||189%|
 Month-to-date and year-to-date as of 6/22/2022
 Cumulative total returns since the end of 2016