After A 14% Fall This Year Is 3M Stock A Better Pick Over Honeywell?

Given its attractive valuation, we believe 3M stock (NYSE: MMM) is a better pick than its sector peer, Honeywell stock (NYSE: HON). Investors have assigned a higher valuation multiple of 3.6x for Honeywell stock versus 1.7x for 3M due to its superior profitability and financial position. In the sections below, we discuss why we believe that MMM will offer better returns than HON in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of Honeywell vs. 3M: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

MMM stock has suffered a sharp decline of 40% from levels of $175 in early January 2021 to around $105 now, while HON stock has seen little change, moving slightly from levels of $215 in early January 2021 to around $200 now, vs. an increase of about 25% for the S&P 500 over this roughly three-year period.

Notably, MMM stock has underperformed the broader market in each of the last 3 years. Returns for MMM stock were 2% in 2021, -32% in 2022, and -14% in 2023 (YTD). The performance of HON stock with respect to the index has been quite volatile, with returns of -2% in 2021, 3% in 2022, and -6% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 21% in 2023 (YTD) – indicating that MMM underperformed the S&P in 2021, 2022, and 2023 and 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 industrial sector, including BA, UNP, and UPS, and even for the mega-cap 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 MMM and HON face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months – or will they see a recovery? We believe 3M will fare better between the two.

1. 3M’s Revenue Growth Is Better 

• 3M’s revenue growth has been better, with a 2.3% average annual growth rate in the last three years, compared to -0.9% for Honeywell.
• 3M’s revenue rose from $32 billion in 2019 to $35 billion in 2021, as the COVID-19 outbreak resulted in a very high demand for personal protective equipment. The company’s overall revenue growth was also driven by higher price realization and strong consumer demand.
• However, this trend reversed in 2022, with revenue declining to $34 billion due to a decline in respirator demand, supply-chain disruptions, high inflation, a strengthening dollar, and slowing economic growth.
• With airlines being one of the worst-hit sectors during the pandemic, Honeywell’s aerospace revenues were weighed down between 2020 and 2022.
• While this trend has now reversed and Honeywell is seeing a steady rise in sales for most of its businesses, including aerospace, building technologies, and performance materials – a softness in the warehouse automation market weighs on its safety and productivity solutions segment sales.
• If we look at the last twelve-month period revenues, Honeywell has fared better with 4.2% sales growth, while 3M saw its revenue decline by 5.8%.
• 3M’s revenue of $8.3 billion in Q3 was down 4% y-o-y. All four segments – Health Care, Safety and industrial, Transportation and electronics, and Consumer – saw sales decline y-o-y. 3M is struggling to expand its top line. This can partly be attributed to a decline in respirator demand post-pandemic. However, its other businesses, including Consumer, haven’t been able to offset this fall. In fact, Consumer sales are down 6% for the nine-month period ending Sep 2023. The company stated that consumers are spending more on essential purchases, weighing on its segment sales.
• Our Honeywell Revenue Comparison and 3M Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, revenue for both Honeywell and 3M is expected to grow at a low single-digit average rate.

2. Honeywell Is More Profitable

• 3M’s operating margin stood at 19.1% in 2022, compared to 19.2% in 2019, while Honeywell’s operating margin declined slightly from 18.7% in 2019 to 18.1% in 2022.
• Looking at the last twelve-month period, Honeywell’s operating margin of 20.1% fares much better than -29.7% for 3M.
• 3M’s operating margin has been weighed down due to a pre-tax charge of $10.3 billion (recorded in Q2’23) related to its proposed settlement agreement regarding per-and polyfluoroalkyl substances (PFAS) litigation. Also, the settlement for Combat Arms in Q3’23 resulted in a pre-tax charge of $4.2 billion.
• Our 3M Operating Income Comparison and Honeywell Operating Income Comparison dashboards have more details.
• Looking at financial risk, Honeywell fares better. 3M’s 28% debt as a percentage of equity is higher than 15% for Honeywell. Also, its 13% cash as a percentage of assets is higher than 10% for 3M, implying that Honeywell has a better debt position and more cash cushion.

3. The Net of It All

• We see that 3M has seen better revenue growth. On the other hand, Honeywell is more profitable and has a better financial position.
• Now, looking at prospects, 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.
• Looking at valuation multiples, 3M fares better, with its stock currently trading at 1.7x trailing revenues, vs. the last five-year average of 2.8x. In contrast, Honeywell is trading at 3.5x revenues, compared to its last five-year average of 3.4x.
• Our 3M (MMM) Valuation Ratios Comparison and Honeywell (HON) Valuation Ratios Comparison have more details.
• Now that most of the litigations around 3M are behind us, we believe that investors can use the current dip in MMM for better gains in the long run. However, slowing sales growth for the company and challenging macroeconomic factors remain near-term risks for the company.

While MMM stock may outperform HON, it is helpful to see how 3M’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 12/12/2023
[2] Cumulative total returns since the end of 2016