Honeywell (NYSE: HON) reported its Q3 results last month, with revenues aligning and earnings beating the street estimates, and we believe that HON stock has ample room for growth, as discussed below. The company reported revenue of $9.2 billion and adjusted profit of $2.27 per share compared to the consensus estimates of $9.2 billion in sales and $2.23 earnings per share. In this note, we discuss Honeywell’s stock performance, key takeaways from its recent results, and valuation.
HON stock has seen a decline of 15% from levels of $215 in early January 2021 to around $180 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in HON stock has been far from consistent. Returns for the stock were -2% in 2021, 3% in 2022, and -15% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that HON underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including UNP, GE, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could HON face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, HON stock looks like it has room for growth. We estimate Honeywell’s Valuation to be $219 per share, reflecting an 18% upside from its current levels of $185. Our forecast is based on a 24x P/E multiple for HON and expected earnings of $9.19 on a per-share and adjusted basis for the full year 2023. The 24x P/E ratio aligns with the company’s last four-year average. The company revised its earnings outlook to be in the range of $9.10 and $9.20 (vs. the $9.05 and $9.25 range earlier).
Honeywell’s revenue of $9.2 billion in Q3 was up 3% y-o-y, led by an 18% rise in Aerospace and a 5% rise in Performance Materials, while Safety & Productivity segment sales fell 24%. Commercial aviation demand drove the Aerospace segment sales, while softness in the warehouse automation market weighed on the Safety & Productivity segment. The company expects its full-year 2023 sales to be between $36.8 billion and $37.1 billion, compared with the $36.7 billion and $37.3 billion range anticipated earlier. Honeywell saw its operating margin expand 140 bps to 20.9% in Q3’23. High revenues and margin expansion resulted in adjusted earnings of $2.27 per share versus the $2.25 figure it reported in the prior-year quarter.
HON stock trades at 20x forward earnings compared to its last four-year average of a little over 24x, and we believe it can see higher levels going forward. The company should continue to benefit from a robust demand environment for its aerospace business. The growth may remain tepid for its other businesses amid challenging macroeconomic factors.
While HON stock appears to have 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.
|S&P 500 Return||5%||14%||96%|
|Trefis Reinforced Value Portfolio||3%||21%||521%|
 Month-to-date and year-to-date as of 11/9/2023
 Cumulative total returns since the end of 2016