Should You Buy Honeywell Stock at $180?

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After a drop of more than 13% since the beginning of the year, at current levels, we believe Honeywell Stock (NYSE: HON) has more room for growth. HON stock has gone from $207 in early January to $180 now. The YTD -13% return for HON marks an outperformance with returns of -22% for the broader S&P500 index.

Looking further ahead, HON stock is up 37% from levels seen at the end of 2018. This marks an outperformance against some of its peers and broader markets, with General Electric stock in up 9%, 3M stock down 32% and the S&P 500 Index up 51% over the same period. Our dashboard – Why Honeywell Stock Moved – provides more details on the factors behind this movement over the past three years.

This 37% rise in HON shares over the past three years was driven by: 1. the company’s P/S ratio, which has increased by 67% to 3.6x currently, compared to 2.2x in 2018, and 2. an 8% decline in its outstanding shares to 683 million from 743 million in 2018. This was partly offset by 3. Honeywell’s revenuewhich has fallen 18% to $34 billion currently, from $42 billion in 2018. That means the company’s earnings per share fell 12% to $49.71 from $56.23.

The decline in revenue can primarily be attributed to the impact of the Covid-19 pandemic on the company’s business, particularly aerospace, as commercial airlines have been one of the hardest hit sectors. during the coronavirus crisis, which has weighed on the company’s overall performance since the start of the pandemic. The company’s spin-off of its turbocharger and HVAC businesses also impacted revenue growth. Taking into account the above activities, sales would have decreased by only 2%.

Now that the worst of the pandemic is likely behind us, economies have rebounded and airlines are enjoying a rebound in travel demand. This should translate into an increase in the company’s aerospace business over the next few years. In the first quarter of 2022, sales of commercial aviation original equipment and spare parts increased by 23% year-on-year. The company’s new businesses, including Quantinuum, will likely add more than $2.0 billion to Honeywell’s revenue by 2026. Honeywell management provided revenue growth guidance (organic) long term from 4% to 7%. With a favorable pricing environment and a rebound in demand for its products, we expect Honeywell’s operating margins to continue to expand after rising 200 basis points between 2018 and 2021. Our Honeywell operating profit dashboard has more details.

Although the company has a strong outlook, it is facing headwinds from the current weakness in broader markets. The S&P500 has now entered bearish territory with growing concerns about slowing economic growth given high inflation, Fed action and supply chain disruptions. That said, we believe Honeywell’s assessment at $232 per share, reflecting a 29% rise from its current market price of $180, implying that investors may be better off using the recent drop to get into HON shares for gains long-term. Our valuation is based on a forward P/E ratio of 27x based on our earnings forecast of $8.62 per share and on an adjusted basis for the full year 2022. This compares to an average of 25x observed in the last three years.

While the HON stock has more room for growth, it is worth seeing how Honeywell peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.

In addition, the Covid-19 crisis has created many price discontinuities which can provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Honeywell against Amkor technology

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Stock prices have fallen precipitously across all sectors over the past few months and we are now in a bear market for the first time since March 2020 when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’

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