Is An Earnings Beat In The Cards For Honeywell?

Honeywell (NYSE: HON) is scheduled to report its Q1 2024 results on Thursday, April 25. We expect the company to report revenue of $9.1 billion and adjusted earnings of $2.19 per share, both slightly above the consensus estimates. While Honeywell will benefit from increased aftermarket services for commercial aerospace, a tough comparison for warehouse automation may weigh on its sales growth. Not only do we expect Honeywell to post an upbeat Q1, we think its stock has some room for growth from its current levels of around $195. Our interactive dashboard analysis of Honeywell’s Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive Honeywell’s results?

Firstly, let us look at its stock performance in recent years. HON stock has seen little change, moving slightly from levels of $215 in early January 2021 to around $195 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Overall, the performance of HON stock with respect to the index has been quite volatile. Returns for the stock were -2% in 2021, 3% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 CAT, GE, and UNP, 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.

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 strong jump? From a valuation perspective, HON stock looks like it can see higher levels. We estimate Honeywell’s Valuation to be $226 per share, over 15% above the current market price of $194. This represents a 23x P/E multiple based on our EPS estimate of $9.97 for Honeywell in 2024. The 23x figure aligns with the stock’s average P/E multiple over the last three years. Honeywell has guided for its 2024 adjusted earnings to be in the range of $9.80 and $10.10 per share.

Looking at the previous quarter, Honeywell’s revenue of $9.4 billion in Q4 was up 3% y-o-y, led by a 15% rise in Aerospace and a 6% rise in Performance Materials, while Building Technologies sales were down 1% and 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. Honeywell saw its operating margin contract 190 bps to 16.8% in Q4’23. High revenues and margin contraction resulted in adjusted earnings of $2.60 per share, versus the $2.52 figure it reported in the prior-year quarter.

Coming to the latest quarter, we think a similar trend will likely be visible, with Aerospace leading the sales growth on the back of a robust aftermarket services demand. However, Safety & Productivity will likely be a drag on the top-line growth due to a continued weakness in warehouse automation. We don’t expect any meaningful change in Building Technologies sales. Overall, Honeywell’s Q1 will primarily be driven by its Aerospace business, while the growth in other segments is  expected to pick up in the coming quarters. Honeywell expects a slight expansion in overall segment margin in 2024, but it may be more favorable in the second half of the year.

While HON stock looks appropriately priced, 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.

[1] Returns as of 4/23/2024
[2] Cumulative total returns since the end of 2016

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