Pick Honeywell Over Rockwell?

Given its better valuation and prospects, we believe Honeywell stock (NYSE: HON) is a better pick than its sector peer, Rockwell Automation stock (NYSE: ROK), an industrial automation and digital transformation solutions provider, for the next three years. HON stock trades at 3.4x revenues, similar to 3.3x for ROK. While Rockwell has seen better revenue growth, Honeywell is more profitable. Both stocks seem comparable from a financial risk perspective. There is more to the comparison, and in the sections below, we discuss why we think HON will outperform ROK in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation.

1. ROK Stock Has Fared Better Than HON

HON stock has seen little change, moving slightly from levels of $195 in early January 2021 to around $200 now, vs. an increase of about 10% for ROK from $235 to $260 over the same period. In comparison, the S&P 500 has risen 45% over this roughly four-year period.

Overall, the changes in these stocks have been far from consistent. Returns for HON stock were 0% in 2021, 5% in 2022, and 0% in 2023, while that for ROK were 41%, -24%, and 23%, respectively. 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 and ROK underperformed the S&P in 2022 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 UNP, MMM, and CAT, 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.

2. Rockwell’s revenue growth is better

Honeywell has seen its revenue rise at an average annual rate of 4% from $32.6 billion in 2020 to $36.7 billion in 2023. In comparison, Rockwell’s sales have grown at an average rate of 13% from $6.3 billion to $9.1 billion over this period. Our Honeywell Revenue Comparison and Rockwell Automation Revenue Comparison dashboards provide more insight into the companies’ sales.

Honeywell reports its sales under four segments – aerospace, building technologies, performance materials and technologies, and safety and productivity solutions. These businesses accounted for 37%, 16%, 32%, and 15% of the company’s total sales in 2023. The company has seen a steady rise in sales lately for aerospace, and building technologies. However, a softness in the warehouse automation market weighs on its safety and productivity solutions business. Much of the sales growth lately is being driven by the aerospace segment, amid higher demand for commercial aviation aftermarket.

Rockwell’s revenue growth in recent years is being driven by higher software and control segment sales. However, the sales for its intelligent devices and software and control segments have trended lower, while lifecycle services sales have improved in recent quarters. The overall weakness in the end market demand has weighed on the company’s sales growth this year.

If we look at the last twelve-month period revenues, Honeywell has fared slightly better with 3.3% sales growth, vs. 2% for Rockwell. Looking forward, we expect Honeywell sales to rise at an average annual rate in the mid-single-digits over the next three years, driven by continued demand for its aftermarket business. In contrast, we expect Rockwell sales to remain flat over the next three years, as a high single-digit expected decline in sales this year, will offset the expected mid-single-digit sales growth in the subsequent years.

3. Honeywell Is More Profitable

Honeywell’s operating margin has expanded slightly from 20.4% in 2020 to 20.6% in 2023, while Rockwell’s operating margin grew from 17.6% to 18.7% over the same period. Looking at the last twelve-month period, Honeywell’s operating margin of 21% fares better than 17.2% for Rockwell. Rockwell has taken initiatives to improve its margins, and is targeting $100 million in cost savings in the second half of this year.

4. Both Stocks Are Comparable From A Financial Risk Perspective

Looking at financial risk, both stocks seem comparable. While Honeywell’s 22% debt as a percentage of equity is higher than 14% for Rockwell, the latter’s 4% cash as a percentage of assets is lower than 14% for Honeywell. This implies that Rockwell has a better debt position, but Honeywell has more cash cushion.

5. The Net of It All

We see that Rockwell has seen better revenue growth and has a better debt position. On the other hand, Honeywell is more profitable and has more cash cushion. Now, looking at the prospects, we believe Honeywell is the better choice of the two, given its superior expected revenue growth in the next three years. We estimate Honeywell’s Valuation to be $236 per share, reflecting over 15% upside from the current market price of around $201. 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.

In contrast, Rockwell stock, at its current levels of $258, is already trading at 27x expected earnings of $9.68 in 2024, aligning with the stock’s average P/E ratio over the last three years. This implies that HON stock has more room to grow, while ROK stock looks appropriately priced, in our view.

While HON may outperform ROK in the next three years, 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 9/10/2024
[2] Cumulative total returns since the end of 2016

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