We think 3M stock (NYSE: MMM) is currently a better pick than Honeywell stock (NYSE: HON), given its lower valuation and better prospects. 3M is currently trading at a more attractive valuation of 2.4x trailing revenues than 3.6x for Honeywell. Even if we were to look at the P/EBIT ratio, 3M stock appears to be more attractively priced with an 11x P/EBIT ratio, compared to 19x for Honeywell. We believe that this gap in valuation does not make sense, and MMM stock will likely offer higher returns over the coming years than HON stock, as discussed in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis 3M vs. Honeywell: Which Stock Is A Better Bet? Parts of the analysis are summarized below. We compare these two companies because they both have a similar revenue base.
While MMM stock looks like it can gain more, our analysis on 3M vs. Thermo Fisher Scientific finds TMO, with a similar revenue base, to be an even better bet. Check out how 3M’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
1. 3M’s Revenue Growth Is Stronger
- Both companies managed to see strong sales growth post the pandemic, but 3M has witnessed a comparatively faster revenue growth over the recent years. 3M’s revenues have risen from $31.7 billion in 2017 to $35.4 billion in 2021, while Honeywell’s revenues have declined from $40.5 billion to $34.3 billion over the same period, partly due to divestiture of its transportation business, which garnered close to $3 billion in annual sales till 2018.
- 3M’s revenue growth over the recent quarters is being driven by high demand for safety and personal protective equipment, while sales for some of its other products, including office products, were hit during the pandemic due to many offices being shut, given the lockdowns and shelter-in-place restrictions, resulting in lower demand. The demand for transportation products was also down due to the lower production of cars amid chip shortages. Our dashboard on 3M’s revenues offers more details on the company’s segments.
- Looking at Honeywell, it has exposure to the Aerospace business, with airlines being one of the worst-hit sectors during the Covid-19 crisis. This has weighed on the company’s overall performance since the beginning of the pandemic. Despite the lower sales for Aerospace, the company has posted overall revenue growth in 2021, led by gains across its other segments – Building Technologies, Performance Materials, and Safety & Productivity Solutions. Our Honeywell Revenues dashboard provides more details on the company’s segments.
- Looking forward, Honeywell’s revenue is expected to grow faster compared to 3M. The table below summarizes our revenue expectation for MMM and HON over the next three years and points to a CAGR of 1.6% for 3M, compared to a CAGR of 3.6% for Honeywell.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies 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 predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate 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.
2. 3M Is More Profitable But With Higher Risk
- 3M’s operating margin of 21% over the last twelve-month period is slightly better than 19% for Honeywell.
- If we look at the recent margin growth, Honeywell stands a bit ahead, with the last twelve months vs. the previous three-year margin change at 1%, compared to just 0.1% for 3M.
- Looking at financial risk, Honeywell is attractive with a lower risk than 3M. Its 17% debt as a percentage of equity is lower than 21% for 3M, while its 19% cash as a percentage of assets is higher than the 10% for 3M, implying that HON has better debt and cash position, and MMM stock is a comparatively more risky bet.
The Net of It All
- Both the companies have a similar revenue base, but the revenue growth has been better for 3M. Furthermore, 3M is more profitable, trading at a comparatively lower valuation. On the other hand, Honeywell offers lower financial risk compared to 3M.
- But what about future expectations? Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe 3M is the better choice of the two. The table below summarizes our revenue and return expectation for 3M and Honeywell over the next three years and points to an expected return of 16% for 3M over this period vs. just 3% for HON, implying that investors are better off buying MMM stock over HON, based on our dashboard – 3M vs. Honeywell – which also provides more details on how we arrive at these numbers.
While MMM stock may outperform HON, the Covid-19 crisis has created many pricing discontinuities, offering attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs. Eagle Materials.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.
|S&P 500 Return||-5%||-10%||92%|
|Trefis MS Portfolio Return||-3%||-12%||246%|
 Month-to-date and year-to-date as of 2/23/2022
 Cumulative total returns since the end of 2016