Honeywell’s Margin Expansion Play: What the Bears Are Missing

Honeywell stock rose 5% on January 29 despite missing revenue targets. The market focused on what actually drives shareholder value: profitability and guidance. Q4 adjusted EPS of $2.59 beat estimates by 2.1%, and more importantly, 2026 EPS guidance of $10.50 came in 0.8% above expectations. But two other factors drove the rally: management accelerated the aerospace spin-off timeline to Q3 2026 (earlier than expected), and the company reported a record backlog exceeding $37 billion with orders up 23% organically. Investors chose earnings, strategic clarity, and demand momentum over revenue.

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Aren’t falling margins a red flag? Here’s where you need to separate noise from signal. GAAP operating margin dropped from 17.6% to 10.2% year-over-year, primarily due to one-time expenses, including restructuring charges and integration costs from acquisitions.

But look at the adjusted operating margin—it actually expanded by 10 basis points to 21.3%. The company improved underlying profitability while absorbing temporary costs. Free cash flow margin declined from 20.6% to 9.2%, but that reflects the lumpy nature of Q4 cash generation and working capital timing, not fundamental deterioration.

Let’s talk numbers. What’s actually growing? Q4 revenue was $9.76 billion, up 6.4% year-over-year, but that missed the $9.91 billion estimate. The bright spot was 11% organic revenue growth, driven primarily by aerospace. Orders surged 23% organically, pushing backlog above $37 billion. That’s real demand.

The aerospace division—which represents 40% of the business—showed strength with 11% organic growth and will be spun off in Q3 2026. The earlier-than-anticipated spin-off timing signals management confidence in the division’s standalone value. Building automation grew 8% organically, while energy and sustainability declined 7%.

Is this sustainable given the one-time margin hits we just saw? That’s the key question, but the adjusted margin expansion tells a better story than GAAP margins suggest. Management points to their “traditional playbook” of price increases, volume growth, and productivity improvements. Q4 showed that the playbook is working on an adjusted basis—10 basis points of margin expansion while absorbing restructuring costs is solid execution. The company spent heavily on R&D (added 600 engineers) and is managing through major portfolio changes—spinning off Aerospace and completing the Advanced Materials separation.

The stock’s up 16% year-to-date. Is that justified? The valuation hinges on whether you believe the 2026 guidance for a 50-90 basis-point expansion in operational margin. With adjusted margins already expanding 10 basis points in Q4 despite headwinds, that guidance looks achievable. Wall Street analysts expect full-year 2026 EPS of $10.50, implying 7% growth from 2025, but that’s conservative given the demand backdrop and margin trajectory. Don’t be surprised if Honeywell raises its earnings projections later in the year.

Free cash flow is what ultimately matters for shareholder returns. The 20% surge in 2025 FCF to $5.1 billion was impressive, but Q4 showed operating cash flow down 38%. The 2026 FCF guidance midpoint of $5.45 billion isn’t bad either.

What about the bigger picture valuation? At around $227 per share following yesterday’s move, Honeywell trades at its 52-week high. The company projects 2026 revenue of $39.3 billion (slightly below estimates) but expects operational margin expansion of 50-90 basis points. Free cash flow guidance of $5.3-5.6 billion represents 4-10% growth.

See, at $227 per share, HON stock trades at 23 times its trailing adjusted earnings, marginally lower than the 24x historical average. We think there’s room for this multiple expansion based on the latest developments. While we currently have a $237 price estimate for HON, this will soon be revised upward to reflect the latest results. So, even after yesterday’s rally, HON stock seems to have more room for growth.

Bottom line for investors: Honeywell has strong demand momentum evident in the record $37 billion backlog and 23% organic order growth, and is executing on portfolio optimization with an accelerated aerospace spin-off timeline. At current prices near $227, you’re paying for a company demonstrating operational leverage with clear strategic direction. The 5% rally yesterday reflected the market’s recognition that underlying fundamentals are stronger than the headline numbers suggest. Surely, some risks, including market and company-specific, can hamper this growth trajectory, but from a risk-reward perspective, we find HON stock to have more upside potential.

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