Aerospace To Drive Honeywell’s Q2?

Honeywell (NYSE: HON) is scheduled to report its Q2 2024 results on Thursday, July 25. We expect the company to report revenue of $9.45 billion and adjusted earnings of $2.42 per share, both slightly above the consensus estimates. Honeywell will likely continue to benefit from increased aftermarket services for commercial aerospace. Although we expect Honeywell to post an upbeat Q2, we think its stock is appropriately priced at its current levels of around $215. 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 $217 now, vs. an increase of about 50% for the S&P 500 over this 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 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 $227 per share, close to the current market price of $217. This represents a 22x P/E multiple based on our EPS estimate of $10.28 for Honeywell in 2024. The 22x 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 $10.15 and $10.45 per share.

Looking at the previous quarter, Honeywell’s revenue of $9.1 billion in Q1 was up 3% y-o-y, led by an 18% rise in Aerospace, while Energy & Sustainability Solutions sales grew 4%. Industrial Automation sales were down 12% and a 4% fall in Building Automation. Commercial aviation demand drove the Aerospace segment sales, while softness in the warehouse automation market weighed on the Industrial Automation segment. Honeywell saw its operating margin expand 130 bps to 20.4% in Q1’24. Higher revenues and margin expansion resulted in adjusted earnings of $2.25 per share, versus the $2.07 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. We expect continued weakness for its warehouse and workflow solutions business. Overall, Honeywell’s Q2 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 like it may see higher levels, 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 7/24/2024
[2] Cumulative total returns since the end of 2016

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