Honeywell And 3M Are Both Focused On Making Masks, But 3M Stock Poised To Gain More

by Trefis Team
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Based on historical performance, and given the current environment, 3M (NYSE:MMM) appears to be an attractive investment opportunity compared to Honeywell International (NYSE:HON). With the global economy feared to go in recession, the consumer spending power will likely decline, and it will impact the revenue for companies, such as 3M and Honeywell. While 3M is manufacturing coronavirus related products, such as masks, the contribution of such products to the company’s top line will likely be less than 1%, and that alone as a factor does not justify the stock’s outperformance (3M’s stock is down by about -15% compared to about 20% decline for the broader S&P since early February), in our view.

For Honeywell, with rapid contraction of air travel, the company’s aerospace business is expected to take a hit, as the new orders could be postponed. The aerospace segment accounts for 45% of the company’s total profits. Though the company’s safety products are seeing high demand in the current crisis. The company has ramped up the production of N95 masks, among other protective gear.

Given the current crisis, both the companies are likely to face pressure on their top line in 2020, which explains the drop in the stock price. 3M’s stock is down by about -15% compared to about -25% for Honeywell since early February. While the near outlook for both the companies remains weak, we believe that among the two, 3M could be a better bet in the current environment. While we don’t expect 3M’s healthcare business to drive any meaningful growth for the company’s overall top line, its other segments could potentially be less impacted compared to Honeywell, which could face pressure on revenues beyond Q2, especially for its aerospace division. Our analysis, Is 3M Expensive Or Cheap Compared To Honeywell After Declining Over -15%? compares the stock price performance and fundamentals of 3M and Honeywell International over the last few years.

CORONAVIRUS CRISIS: Since early February, 3M stock has declined -15% compared to -25% for Honeywell

  • 3M’s stock has declined by about 15% since early February, compared to 25% decline for Honeywell, after the WHO declared a global health emergency relating to Coronavirus.
  • 3M’s stock fell 13% while Honeywell’s stock fell 21% since March 8th, as the U.S. cases accelerated

HISTORICAL PERFORMANCE: From 2009-2019 3M stock has grown at 0.4x the rate of Honeywell International

  • 3M stock went from $63.25 at the end of 2009 to $174.84 at the end of 2019, representing a change of 176.4%.
  • During the same time period, Honeywell International went from $30.98 to $176.05 representing a change of 468.3%.
  • This implies that 3M stock grew at 0.4x the rate of Honeywell International.

ANALYSIS:

How do valuations for 3M and Honeywell International compare, based on the review of fundamentals?

  • P/E Ratio: Based on current P/E ratios, both Honeywell and 3M stocks look attractive compared to prior years.
  • 3M’s current P/E ratio of 17.0 is 1.1x that of Honeywell International’s P/E ratio of 15.2.

Historical Revenue & EPS Growth

  • 3M 2014-19 annualized revenue growth of 0% compares with 2014-19 Honeywell’s annualized revenue growth rate of -1.5%.
  • 3M 2014-19 annualized EPS growth of <1% is 0.09x that of the 2014-19 Honeywell’s annualized EPS growth rate of 7.9%.
  • However, this outperformance of Honeywell can primarily be attributed to a massive y-o-y surge in EPS in 2018, after the company recorded one-time provisional charge of around $4 billion in 2017, which pushed the 2017 GAAP EPS lower.

Conclusion

3M stock has been more resilient through the crisis, thus far, with expectations of growth from healthcare in the current crisis. Though this won’t be enough to drive growth for 3M given the size of the business, 3M still appears to be a better bet as compared to Honeywell, for a larger upside when the health crisis abates. Based on historical growth, both 3M and Honeywell have seen comparable revenue growth, their P/E ratios have largely been similar of late, and both the companies have similar cash flows from operations. As we look forward, it appears Honeywell’s business could be more impacted due to its aerospace division. The ongoing financial distress faced by airlines, and negative consumer sentiment on air travel, will likely continue to weigh on the overall air travel industry in the near term, and also on Honeywell.

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