Pick Honeywell Over 3M Stock?

Given its better valuation and prospects, we believe Honeywell stock (NYSE: HON) is currently a better pick than its sector peer, 3M stock (NYSE: MMM). HON stock trades at 22x forward expected earnings, versus 18x for MMM, and we think that this gap in valuation multiple will likely remain in favor of Honeywell, given its better revenue growth and profitability. We expect HON stock growth to be driven by robust commercial aviation aftermarket demand. There is more to the comparison, and in the sections below, we discuss why we think HON will outperform MMM in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation.

1. HON Stock Has Fared Better Than MMM

HON stock has witnessed gains of 20% from levels of $195 in early January 2021 to around $230 now, vs. only a little change for MMM, moving from $125 to $130 over this period. In comparison, the broader S&P 500 index has risen 55% over this roughly four-year period.

However, 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 MMM were 5%, -30%, and -3%, 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 MMM underperformed the S&P in 2021, 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 UPS, UNP, 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. Honeywell’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, 3M’s sales have grown at an average rate of 0.7% from $32.2 billion to $32.7 billion over this period. Our Honeywell Revenue Comparison and 3M 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.

3M did see a spike in sales in 2021, owing to a very high demand for masks and personal protective equipment due to the spread of Covid-19. However, its sales declined around 8% between 2021 and 2023 post pandemic. 3M’s other businesses also took a hit due to supply chain disruptions, high inflation, a strengthening dollar, and slowing economic growth. 3M’s consumer business has also been facing headwinds lately, amid lower automotive aftermarket, home improvement, auto-care, and packaging sales.

Looking at the latest quarterly performance, Honeywell reported revenue of $9.7 billion in Q3, up 6% y-o-y, led by a 12% rise in Aerospace and a 14% rise in Building Automation, partly offset by a 5% fall in the Industrial Automation segment sales. The company’s adjusted earnings per share of $2.58 was 8% above the $2.38 figure seen in the prior-year quarter. On the other hand, 3M reported a 0.4% revenue growth to $6.3 billion in Q3, 2024. Transportation and Electronics segment sales were down 1.5%, Safety & Industrial revenue was up 0.5%, and the Consumer segment saw a 1.2% decline in sales. 3M’s bottom line of $1.98 was up 18% y-o-y.

Looking forward, we expect Honeywell sales to rise at an average annual rate in the high single-digits over the next three years, driven by continued demand for its aftermarket business. In contrast, we expect 3M sales to see a low single-digit average growth rate over the next few years.

3. Honeywell Is More Profitable

Honeywell’s operating margin has expanded slightly from 20.4% in 2020 to 20.6% in 2023, while 3M’s operating margin plunged from 21.5% to -27.6% over the same period. Notably, 3M’s reported operating margin was significantly impacted due to the settlement of litigation. The company took a pre-tax charge of $10.3 billion (recorded in Q2’23) related to its proposed settlement agreement regarding PFAS litigation, and the settlement for Combat Arms in Q3’23 resulted in a pre-tax charge of $4.2 billion. On an adjusted basis, its operating margins stood at 20.3% in 2023.

Looking at the last twelve-month period, Honeywell’s operating margin of 20.9% fares slightly better than 19% for 3M.

4. 3M Fares Better From A Financial Risk Perspective

Looking at financial risk, 3M seems to have an edge over Honeywell. 3M’s 20% debt as a percentage of equity is marginally lower than 21% for Honeywell. Furthermore, its 18% cash as a percentage of assets is higher than 15% for Honeywell. This implies that 3M has a better debt position, and it has more cash cushion.

5. The Net of It All

We see that Honeywell has seen better revenue growth, is more profitable and has a better debt position. On the other hand, 3M has more cash cushion, and it trades at a comparatively lower valuation multiple. 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 as well as a better valuation when compared to the historical averages.

At its current levels of $228, HON stock trades at 22x forward expected earnings of $10.19 per share. The 22x figure is slightly lower than the stock’s average P/E ratio of 24x over the last five years. In comparison, MMM stock, at its current levels of $128, trades at 18x forward expected earnings of $7.28 per share in 2024. This compares with the stock’s average P/E ratio of 16x over the last five years.

Now, a slight rise in valuation multiple for 3M seems justified in our view, given that the company is addressing the litigations, and it has spun-off its healthcare business this year. Still, we think the weakness in consumer sentiment may continue to weigh on its performance in the near-term, while Honeywell should see robust demand for its commercial aviation aftermarket business.

While HON stock may outperform MMM stock 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 11/20/2024
[2] Cumulative total returns since the end of 2016

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