Company Reports

Wide-moat Honeywell's second-quarter sales of $9.6 billion came in at the high end of management's guidance, while adjusted EPS of $2.49 was above guidance. However, management lowered its full-year outlook due to industrial sector weakness, sending shares down more than 4% in intraday trading on July 25. We've lowered our fair value estimate to $226 per share from $238 to reflect muted near-term expectations as Honeywell integrates three acquisitions representing over $8.6 billion in aggregate spending.

In our view, Honeywell is one of the stronger multi-industry firms in operation today. Its underlying strategy is similar in each end market: to embed its own products into the operations of customers from which recurring revenue can be generated through aftermarket servicing. We predicate our long-term thesis on secular demand for warehouse automation, remote security management, energy savings in buildings, and the global commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit organic top-line growth, incremental segment operating margins in the high 20s to low 30s, 9%-10% adjusted earnings per share growth, and free cash flow margins in the mid teens.

After taking a fresh look at this multi-industry stalwart, we’ve increased Honeywell’s fair value estimate to $238 per share from $226 derived from a slightly more bullish view on its growth prospects. We’ve maintained our wide-moat economic moat rating and Exemplary capital allocation rating. Near-term, we expect the ongoing narrow-body plane shortage to drive supranormal commercial aviation aftermarket growth, and the continual reshoring of supply chains to spur demand for Honeywell’s building and warehouse products.

In our view, Honeywell is one of the stronger multi-industry firms in operation today. Its underlying strategy is similar in each end market: to embed its own products into the operations of customers from which recurring revenue can be generated through aftermarket servicing. We predicate our long-term thesis on secular demand for warehouse automation, data analytics in power plants, remote security management, energy savings in buildings, and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit organic top-line growth, incremental segment operating margins in the high 20s to low 30s, 9%-10% adjusted earnings per share growth, and free cash flow margins in the midteens.

In our view, Honeywell is one of the stronger multi-industry firms in operation today. We think the company has successfully pivoted to capture multiple ESG trends, including energy efficiency, emissions reduction, and e-commerce. We predicate our long-term thesis on overall increases in demand for warehouse automation solutions despite tough 2023 comps in that busines, new digital offerings that promote data analytics in powerplants, remote security management, energy savings in building solutions, and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the high 20s to low 30s, 9%-10% adjusted earnings per share growth, and free cash flow margins in the midteens.

Wide-moat-rated Honeywell reported good first-quarter results, with organic revenue growth of 3% and segment margin expansion of 20 basis points coming in at the top end of management’s guidance range and adjusted EPS of $2.25 exceeding guidance. Honeywell’s reported sales of $9.1 billion were about 1% above the FactSet consensus estimate, and the firm’s adjusted EPS was 3.5% higher than consensus.

In our view, Honeywell is one of the strongest multi-industry firms in operation today. We think the company has successfully pivoted to capture multiple ESG trends, including energy efficiency, emissions reduction, and e-commerce. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the high 20s to low 30s, 9%-10% adjusted earnings per share growth, and free cash flow margins in the midteens.

Honeywell's shares traded lower on Feb. 1 after the wide-moat firm released its fourth-quarter and full-year 2023 results and provided 2024 guidance. Fourth-quarter revenue grew 3% (2% organic) to $9.4 billion, segment margin expanded 60 basis points to 23.5%, and adjusted EPS increased 3% to $2.60. While adjusted EPS came in $0.01 above the FactSet consensus estimate, revenue fell about 3% shy of consensus, and management’s 2024 revenue outlook of $38.1 billion-$38.9 billion fell short of the $39.0 billion consensus expectation.

Honeywell is one of the strongest multi-industry firms in operation today. We think the company has successfully pivoted to capture multiple ESG trends, including energy efficiency, emissions reduction, and e-commerce, among others. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the high-20s to low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the midteens.

On Dec. 8, wide-moat-rated Honeywell announced that it has agreed to purchase Carrier’s security business for $4.95 billion, or 17 times adjusted 2023 EBITDA (per Carrier’s press release). This business consists of three brands: LenelS2 (commercial and enterprise access solutions), Onity (electronic locks with significant hospitality market presence), and Supra (real estate lock boxes). Together, we estimate these businesses generate approximately $1 billion of sales with an EBITDA margin in the high-20% range. Honeywell’s management sees this acquisition as an opportunity to expand its building automation exposure, which is a key market growth driver for its building technologies business.

Honeywell is one of the strongest multi-industry firms in operation today. We think the company has successfully pivoted to capture multiple ESG trends, including energy efficiency, emissions reduction, and e-commerce, among others. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the midteens.

Narrow-moat-rated Carrier is in the midst of a major portfolio transformation. It expects to complete its EUR 12 billion acquisition of Viessmann, a large player in the European heat pump and boiler market, in early January, and the firm will also divest its security, commercial refrigeration, and fire businesses. On Dec. 8, Carrier announced that it has reached an agreement with Honeywell to sell its security business for $4.95 billion, or 17 times adjusted 2023 EBITDA. This business consists of three brands: LenelS2 (commercial and enterprise access solutions), Onity (electronic locks with significant hospitality market presence), and Supra (real estate lock boxes). Together, we estimate these businesses generate approximately $1 billion of sales with an EBITDA margin in the high-20% range. We think Carrier received a favorable price for these assets, and we’ve raised our fair value estimate 2% to $50 per share after incorporating the security sale into our valuation model. We’re also now incorporating the Viessmann acquisition into our explicit financial forecast. We continue to view the acquisition as roughly value neutral based on our current growth and profitability outlook for the business.

Honeywell is one of the strongest multi-industry firms in operation today. We think the company has successfully pivoted to capture multiple ESG trends, including energy efficiency, emissions reduction, and e-commerce, among others. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the midteens.

Nothing in wide-moat-rated Honeywell's third-quarter results materially alters our long-term view. Therefore, we maintain our $228 fair value estimate. In fact, sales and earnings were right in line with expectations, and segment operating margins of 22.6% were nearly 20 basis points better. Honeywell earnings did beat the top end of the range by 2 cents, but we were already baking in a slight beat. We did slightly trim our long-term margin expectations for safety and productivity solutions, but this was fully offset by time value of money. Overall, this quarter bore few surprises. Encouragingly, the stock now trades at a decent discount to fair value (about a 22% discount as of this writing).

Honeywell is one of the strongest multi-industry firms in operation today. We think the firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the midteens.

Wide-moat-rated Honeywell announced it’s realigning its business segments, beginning in the first quarter of 2024. We see no reason to change our $228 fair value estimate, particularly since we’re skeptical the changes will translate to meaningful growth synergies. We think the realignment changes make sense, though the technology-focused name changes strike us mostly as a marketing effort. After all, Honeywell is still predominantly an industrial company (technology solutions are less than 10% of sales, and most of these are embedded in hardware). Even so, its technology is a key part of the firm’s strategy and should help its long-term sales growth algorithm.

There were no meaningful surprises in wide-moat rated Honeywell’s second-quarter earnings results, as earnings were in line with our expectations. We raise our fair value estimate to $228 from $225, but that’s solely due to time value of money.

Honeywell is one of the strongest multi-industry firms in operation today. We think the firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the midteens.

After reviewing wide-moat-rated Honeywell’s first-quarter results, we bump up our fair value estimate to $225 from $222—$1 of the raise is due to our improved outlook for 2023, while the remaining $2 comes from time value of money.

Honeywell is one of the strongest multi-industry firms in operation today. We think the firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others. We predicate our long-term thesis on increased demand for warehouse automation solutions, despite tough 2023 comps; new digital offerings that promote data analytics in powerplants, as well as remote security management, and energy savings in building solutions; and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, incremental operating margins in the low-30s, between 9% and 10% adjusted EPS growth, and free cash flow margins in the midteens.