Here’s A Better Pick Over Honeywell Stock

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Honeywell

We believe that Emerson Electric stock (NYSE: EMR) is a better pick than Honeywell stock (NYSE: HON), given its better prospects. Honeywell is trading at a comparatively higher valuation multiple of 3.6x trailing revenues vs. 2.4x for Emerson, and we think that this gap in valuation should narrow in favor of Emerson, given its superior revenue growth and profitability, as discussed below.

Looking at stock returns, Honeywell, with -11% returns this year, has fared marginally better than EMR, down 13%, and both have underperformed the broader markets, with the S&P 500 index, up 7%. There is more to the comparison, and in the sections below, we discuss why we believe EMR 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 multiple, in an interactive dashboard analysis of Honeywell vs. Emerson ElectricWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Emerson’s Revenue Growth Is Better

  • Both companies saw their revenue rise in the last twelve months. Still, Emerson’s 7.6% growth was better than the 3.1% for Honeywell.
  • Even if we look at a longer time frame, Emerson has fared better, with its sales rising at an average rate of 2.6% to $19.6 billion in 2022, from $18.4 billion in 2019, while Honeywell saw its sales decline at an average rate of -0.9% to $35.5 billion in 2022, vs. $36.7 billion in 2019.
  • 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.
  • For Emerson Electric, the revenue growth over the recent years has been driven by increasing demand for residential, cold-chain, and professional tools. Both of the company’s segments – Automation Solutions and Commercial & Residential Solutions — have seen a steady rise in sales over the recent years, a trend expected to continue in the near term.
  • Its 2022 underlying revenue growth of 9% y-o-y reflected a good mix of a 4% rise in volume and a 5% contribution from better pricing.
  • Note that Emerson Electric has announced divestiture plans for its Climate Technologies business, which accounted for 26% of its total sales in 2022. Earlier this year, Emerson offered $7 billion to acquire National Instruments, reflecting a 32% premium to the latter’s stock price before this announcement.
  • Our Honeywell Revenue Comparison and Emerson Electric 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% for Honeywell and 6% for Emerson.
  • 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. Emerson Is More Profitable But Comes With Higher Risk

  • Emerson’s operating margin of 21.8% over the last twelve-month period is better than 19.3% for Honeywell.
  • This compares with 16.5% and 19.6% figures seen in 2019, before the pandemic, respectively.
  • Honeywell and Emerson have similar free cash flow margins of about 15%.
  • Our Honeywell Operating Income Comparison and Emerson Electric Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Honeywell fares better. Its 15% debt as a percentage of equity is lower than 29% for Emerson, while its 16% cash as a percentage of assets is higher than 5% 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 Emerson’s revenue growth is better, the company 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 Emerson is currently the better choice of the two. The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 15% for Emerson over this period vs. a 3% expected return for Honeywell stock, implying that investors are better off buying EMR over HON, based on Trefis Machine Learning analysis – Honeywell vs. Emerson Electric – which also provides more details on how we arrive at these numbers.

While EMR 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 an 11% fall 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 Apr 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
HON Return 0% -11% 72%
EMR Return -4% -13% 49%
S&P 500 Return 0% 7% 83%
Trefis Multi-Strategy Portfolio -2% 6% 232%

[1] Month-to-date and year-to-date as of 4/9/2023
[2] Cumulative total returns since the end of 2016

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