October 11, 2023: $187.40
Business Overview:
Honeywell International Inc. is a US-based multinational conglomerate that operates in several sectors:
- Aerospace: Honeywell’s Aerospace segment offers various aircraft engines, integrated avionics, systems, and services for various aviation sectors, including aircraft manufacturers, airlines, military, and space. They also serve airport operations.
- Home and Building Technologies (HBT): HBT provides products, software, and technologies for homeowners and building owners. Their offerings include HVAC control, security, and fire safety products.
- Performance Materials and Technologies (PMT): PMT specializes in advanced materials, process technologies, and automation solutions. They offer petrochemicals, refining, gas processing, hydrogen, and automation control solutions across various industries such as oil and gas, pulp and paper, power generation, and more.
- Safety and Productivity Solutions (SPS): SPS delivers products, software, and connected solutions that enhance productivity, workplace safety, and asset performance. They cater to a wide range of markets, including aerospace, automotive, healthcare, manufacturing, and transportation.
Maverick Guidance:
- Short-term: Sell
- Long-term: Sell
- Some earnings were negatively impacted by exiting the Russian market and a decline in the safety and productivity arm.
- The company anticipates improvements in 2024, particularly in areas like automation and performance materials.
- More recurring sales are expected, which is favorable in the current investment climate.
- The 2023 outlook includes sales in the range of $36 billion to $37 billion and earnings per share between $8.80 and $9.20.
- The company foresees improvements in 2024, particularly in automation and performance materials.
Consideration for a Maverick Portfolio:
For the long-term-oriented Mavericks, Honeywell International fits in any of three portfolios:
- HON is appropriate for Mavericks with a risk profile score of 16-21. The Moderately Conservative Investor aims for a balanced approach that combines growth and stability. The Maverick CAUTIOUS GROWTH portfolio is designed to achieve modest medium-term total returns.
- HON is appropriate for Mavericks with a risk profile score of 22-29. The Moderate Investor seeks to balance caution and ambition, aiming for reasonable growth while managing risk. The Maverick MODERATE GROWTH portfolio is designed to maintain a stable yet potentially rewarding financial strategy by including a mix of conservative and moderately aggressive Dow 30 stocks.
- HON is appropriate for Mavericks with a risk profile score of 30-35. The Moderately Aggressive Investor is willing to take on higher risk for the potential of higher returns. The Maverick DYNAMIC GROWTH portfolio includes a higher allocation of high-growth-oriented Dow 30 stocks to align with this risk-tolerant approach.
Market timing must also be considered.
Internal Strength/Weakness
Strengths:
- Diversified Business: Honeywell operates in various sectors, which include aerospace, home and building technologies, performance materials and technologies, and safety and productivity solutions. This diversification helps the company mitigate risks associated with any one sector.
- Strong R&D Capabilities: Honeywell is recognized for its strong focus on research and development, creating innovative products and solutions that establish a strong market position.
- Global Presence: With operations in over 70 countries and sales in more than 150 countries, Honeywell has a significant international footprint. This global presence allows it to serve a broad customer base and diverse markets.
- Brand Reputation: Honeywell has a well-established brand image known for high-quality and reliable products and solutions, which enhances customer loyalty and acquisition.
- Sustainable and Smart Solutions: Honeywell’s commitment to integrating digital technology with physical products to create smart, safe, and sustainable solutions aligns with current global trends, positioning them for future growth.
- Strong Relationships with Stakeholders: Honeywell has developed strong relationships with its stakeholders, including customers, suppliers, and government entities. These relationships contribute to a stable supply chain and growth opportunities.
Weaknesses:
- Over-reliance on Suppliers: Honeywell relies on numerous suppliers for raw materials, making its production susceptible to supply chain disruptions caused by unforeseen circumstances.
- Complexity in Management: Managing a diverse portfolio across various countries and sectors can lead to administrative complexity, potentially affecting organizational efficiency.
- Impact of Economic Cycles: Certain segments, like aerospace, are subject to the cyclical nature of industries. Economic downturns can significantly affect these segments and Honeywell’s performance.
- Regulatory Risks: Operating globally, Honeywell must comply with the laws and regulations of multiple countries. Changes in these regulations could significantly impact its operations.
- Dependency on Government Contracts: A substantial portion of Honeywell’s revenue comes from government contracts. Government policy or budget changes, particularly in the defense sector, can impact the company’s performance.
- Environmental Concerns: Some of Honeywell’s operations involve substances that could harm the environment. This exposes the company to environmental regulations and potential liabilities.
- Technological Disruption: Rapid technological advancements pose a risk of obsolescence or reduced competitiveness for some of Honeywell’s products, necessitating ongoing and substantial R&D investment to stay ahead.
External Opportunities/Threats
Opportunities:
- Digital Transformation: Honeywell can expand its digital products and services, leveraging its expertise in integrating physical and digital technologies.
- Sustainability and Energy Efficiency: Increasing demand for energy-efficient and environmentally friendly products aligns with Honeywell’s building technologies and performance materials offerings.
- Emerging Markets: Growing middle-class populations in emerging markets offer opportunities for Honeywell’s home, building technologies, and other products and services.
- Industrial Automation and IoT: The trend toward automation and IoT presents growth prospects, especially in Honeywell’s safety and productivity solutions segment.
- Aerospace Recovery: As the aerospace industry rebounds post-COVID-19, Honeywell’s aerospace segment stands to benefit.
- Government Spending on Infrastructure and Defense: Increased government spending in infrastructure and defense sectors presents opportunities for Honeywell’s diverse portfolio.
Threats:
- Economic Uncertainty: Global economic instability, especially during events like the COVID-19 pandemic, can impact Honeywell’s business across segments.
- Regulatory Changes: Compliance with various regulations in different countries and industries is critical, as changes or non-compliance can have severe consequences.
- Competitive Pressure: Intense market competition may result in price pressures, potential market share loss, or the need for increased investment in technology and innovation.
- Supply Chain Disruptions: Disruptions in global supply chains can affect the availability of raw materials and components for Honeywell’s products, stemming from political, trade, or environmental factors.
- Technological Disruption: Rapid technological advances may render Honeywell’s products or services obsolete, necessitating continuous innovation to remain competitive.
- Environmental and Climate Risks: Honeywell’s operations face environmental risks, and a heightened focus on sustainability and climate change impacts could lead to stricter regulations and increased operational costs.
- Cybersecurity Threats: As Honeywell becomes more digitally focused, cybersecurity breaches pose financial and reputational risks.
Market Guidance:
- Point & Figure Pattern: Double Bottom Breakdown on 02-Oct-2023 (from StockCharts)
- The company’s strong reputation and blue-chip status make it a premium investment choice for Wall Street.
- Consensus Analyst Ratings— MarketBeat = Hold, TipRanks = Hold.
- 12 Wall Street analysts have offered 12-month price targets for Honeywell in the last 3 months. There are 8 Buy, 3 Hold, and 1 Sell. (from TipRanks)
- The average price target is $226.91, with a one-year high forecast of $265.00 and a low forecast of $180.00. (from TipRanks)
- Dividend Yield: $1.08 per share paid quarterly to yield 2.2%. (from TipRanks)
- Technical Analysis: Investing.com = Strong Sell, TipRanks = Sell.
Value Line Guidance: (all from VL)
- Company Financial Strength Rating: A++
- Share Price Safety, Market Timing, and Technical Rank:1=best. 5=worst
- Share Price Safety: 1/5
- Market Timing: 4/5
- Technical Rank: 5/5.
- Stock’s Price Stability: 85/100
- Price Growth Persistence: 85/100
- Earnings Predictability: 95/100
- Earnings growth of 10% is anticipated for 2024.
Revenue, Cash Flow, Earnings Quarterly Operations Review:
1Q2023 Quarterly Report Summary:
- Honeywell anticipates sales and earnings growth of approximately +4% in 2023.
- Commercial aerospace and the process solutions arm were key drivers of revenue growth in the second quarter of 2023.
- Improved efficiencies in safety and protection areas led to higher profitability.
- The backlog at the end of the quarter reached an all-time peak of $30.5 billion, up +2% year over year.
- Sales for the year are expected to be just under $37 billion, with earnings per share estimated at $9.15.
- The company made a $700 million strategic acquisition of Compressor Controls Corporation, expanding its energy transition offerings in industrial control and automation sectors.
- The outlook for 2024 includes annual earnings growth exceeding 10%, driven by improved productivity and increased demand, pushing sales past $39 billion.
2Q2023 Quarterly Report Summary:
- Sales and earnings at Honeywell are expected to grow by approximately 4% in 2023, with some upside potential if the global economy remains strong.
- The first quarter of 2023 showed strength in the aerospace and performance materials segments.
- The backlog increased by 6% to $30.3 billion, with aerospace contributing significantly.
- Management remains cautiously optimistic due to the uncertain macroeconomic environment.
- Management provided an outlook for 2023, with sales expected between $36 billion and $37 billion and earnings per share in the range of $8.80 to $9.20. The company’s 2023 earnings per share estimate was raised to $9.15.
4Q2022 Quarterly Report Summary:
- Honeywell shares declined more than 10% in the last three months, reflecting a challenging sentiment towards industrial diversified companies.
- While some segments showed weakness in the fourth quarter of 2022, Honeywell is considered one of the strongest companies in the sector.
- The company’s forward-looking estimates were adjusted downward due to these challenges.
- The company had a solid succession plan in place with Vimal Kapur taking over as CEO.
- The 2023 earnings estimate was reduced to $9.05 per share.
Operations 3-to-5-year Outlook (Revenue, Cash Flow, Earnings) (all from VL)
- Revenue Growth Potential: +8.0%
- Cash Flow Growth Potential: +10.0%
- Earnings Growth Potential: +11.0%
- The 3-to-5-year outlook indicates continued growth in revenue and earnings.
- The company’s long-run outlook is cautiously optimistic, focusing on capitalizing on opportunities in areas like automation and performance materials. The Quantum Solutions arm is expected to excel, capitalizing on the expanding quantum computing market.
- A strategic partnership with HSBC Bank and a competitive edge in quantum technology offer growth opportunities.
- The shift towards more recurring sales is seen as a positive aspect of the current investment landscape.
Financial Performance
- 10-year Average Annual Total Return: +10.87% (through Oct 11, 2023) (Dow 30 2nd quartile) (https://www.averageannualreturn.com/hon/?l=1)
- 10-year EPS Growth Rate: +5% https://www.ruleoneinvesting.com/eps-calculator/
- EPS 2022: $8.78 2023: e$9.15 2024: e$10.10 (from Value Line Quarterly Report)
- Average Annual PE: 17x (VL Quarterly Report)
- PEG Ratio: 2.83 (FinViz)
- Dividend Growth Potential: +6.0% (VL)
- Beta: 0.77 (FinViz)
Strategic Developments
- Honeywell Aerospace is collaborating with the Department of Energy on a hydrogen fuel storage system for unmanned aerial vehicles.
- The collaboration involves testing fuel cartridge technology, fuel cell evaluation, and supply-chain support for this innovative project. While the financial details of this collaboration were not disclosed, it signifies Honeywell’s involvement in cutting-edge research.
- A succession plan was announced, with Vimal Kapur taking over as CEO from Darius Adamczyk.
Conclusion
- Honeywell is a safe investment, but Mavericks have more attractive growth options as the stock’s long-term capital appreciation potential is considered subpar, pending further declines in the near term.
- Honeywell’s shares have declined due largely to concerns about the industrial sector’s performance in a recession.
10-Year Historical Price Chart:
https://tvc-invdn-com.investing.com/data/tvc_36b2cd974b24800ef00f8ad114ed2120.png
Point & Figure Chart: (from StockCharts.com)
https://stockcharts.com/freecharts/pnf.php?c=HON,PWTAMANRNO[PA][D][F1!3!!!2!20]
