Should You Pick Honeywell Stock At $200 Levels After An Upbeat Q2?

Honeywell (NYSE: HON) recently reported its Q2 results, with revenues and earnings exceeding our estimates. The company reported revenue of $9.6 billion and adjusted earnings of $2.49 per share, compared to our estimate of $9.4 billion and $2.42, respectively. The company has been benefiting from a pickup in commercial aviation demand, a trend expected to continue. However, Honeywell lowered its full-year 2024 segment margin, earnings, and cash flow outlook, due to the impact of acquisitions. This didn’t bode well with the investors, and the stock declined 5% in a week. We think that HON stock has some room for growth, as discussed below. In this note, we look at Honeywell’s stock performance, key takeaways from its recent results, and valuation.

Firstly, looking at its stock performance, HON stock has seen little change, moving slightly from levels of $215 in early January 2021 to around $205 now, vs. an increase of about 45% 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 and RTX, 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, we think HON stock offers some room for growth. We estimate Honeywell’s Valuation to be $236 per share, reflecting over 15% above the current market price of around $205. This represents a 23x P/E multiple based on our EPS estimate of $10.27 for Honeywell in 2024. The 23x figure aligns with the stock’s average P/E ratio over the last three years.

Honeywell’s revenue of $9.6 billion in Q2 was up 5% y-o-y, led by Aerospace Technologies, up 16%. Looking at other segments, Building Automation sales were up 4% and Energy & Sustainability Solutions revenue saw a 2% rise. However, Industrial Automation sales were down 8%, due to continued softness in the warehouse automation market. Honeywell’s segment profit margin of 23% in Q2’24 aligned with the levels seen in the prior-year quarter. Its adjusted earnings of $2.49 per share were up 8% y-o-y.

Looking forward, Honeywell expects its full-year 2024 sales to be in the range of $39.1 billion to $39.7 billion, compared to its earlier guidance of $38.5 billion to $39.3 billion. However, it lowered its outlook on other metrics. It now expects the segment margin to be in the range of 23.3% to 23.5%, versus its prior outlook of 23.8% to 24.1%. Similarly, it expects adjusted earnings per share to be in the range of $10.05 and $10.25, compared to its earlier provided range of $10.15 to $10.45.

Overall, Honeywell posted an upbeat Q2 with continued growth for its aerospace business. While the downward revision in earnings outlook was a slight let down, we think investors can use this current dip as an opportunity to pick HON stock for robust gains in the long term. HON stock is trading at a little under 20x forward expected earnings, compared to the 23x average seen over the last three years.

While HON stock appears to have some room for growth, 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 7/28/2024
[2] Cumulative total returns since the end of 2016

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