Honeywell International (HON) develops and commercializes technologies that aim to encounter the most critical global challenges regarding security, air travel, productivity, global urbanization, energy, and safety.
Through its technology and manufacturing expertise, Honeywell is uniquely positioned to integrate physical products with software to benefit its worldwide customers through various ways and applications.
Honeywell features two significant attributes that investors are likely to appreciate during the current volatile environment.
The first is that Honeywell showcases a heavy backlog which illustrates the approximate outstanding value of assignments to be delivered under firm contracts. Therefore, Honeywell’s cash flows are relatively enduring and predictable and are likely to stay sturdy even during economic climates with high levels of uncertainty.
The second is that several of Honeywell’s principal customers include governments. Specifically, Honeywell serves both the U.S. government and international governments. Therefore, the company faces reduced counterparty risk, as governments are nearly impossible to default on their contractual duties.
In my view, Honeywell’s investment case offers investors increased levels of certainty relative to the overall market during the current economic environment. The company’s dividend growth prospects remain robust as well. However, I still find shares rather overpriced at their current price levels. For this reason, I am neutral on the stock.
Recent Performance
Honeywell’s Q4 results ended the company’s Fiscal 2021 on a fine note, with overall performance coming in strong. Revenues grew 5% during the year, or 4% on an organic basis, to $34.4 billion.
Further, despite the ongoing supply chain bottlenecks that have resulted in rising costs, especially for companies in the aerospace and defense industry, Honeywell’s operating margin expanded by 50 basis points to 18.0%. Accordingly, the company achieved elevated profitability levels, with adjusted earnings per share coming in at $8.06, 14% higher versus $7.10 in Fiscal 2020.
Aerospace, Honeywell’s most harmed division by COVID-19, continued to struggle, but its near-term trajectory appears promising.
While Aerospace sales declined 4% in 2021, business and general aviation original equipment, aftermarket, and air transport aftermarket all grew by double-digits as build rates and flight hours rose. Commercial aviation aftermarket revenues grew 16% year-over-year in Q4, establishing momentum in the aftermarket recovery.
In fact, the segment’s margin grew 140 basis points to 29.0%, boosted by increased pricing and productivity, despite the higher cost of materials. Consequently, it’s more than likely that we will see aerospace sales growth resuming in Fiscal 2022, which is certainly exciting.
Honeywell’s outlook for this year somewhat mirrors that. Management anticipates revenues to land between $35.4 billion and $36.4 billion, suggesting year-over-year organic growth of 4% to 7%. Excluding the impact of COVID-19-driven mask sales, which are expected to decline, organic growth should land between 5% and 8%.
Segment margin is also expected to expand by anywhere between 10 and 50 basis points, resulting in management forecasting Fiscal 2022 adjusted EPS between $8.40 and $8.70. At the midpoint, it implies year-over-year growth of 6.0% compared to Fiscal 2021.
Importantly, Honeywell’s backlog remains at substantial levels. The company ended the year with a backlog of $28 billion, 7% higher year-over-year. Hence, its short-term performance is more or less ensured to remain vigorous.
Dividend and Valuation
Honeywell has been increasing or maintaining its dividend since 1992. In times of uncertainty, Honeywell has paused dividend hikes to conserve adequate levels of liquidity, but the company typically tends to increase its dividend on an annual basis.
With the latest dividend increase by 5.4% to a quarterly rate of $0.98 in October, Honeywell now counts 12 years of successive annual dividend hikes.
Taking into account the midpoint of management’s guidance for Fiscal 2022 and the current DPS run-rate of $3.92, Honeywell features a healthy payout ratio of 45.8%. With management targeting 6% adjusted EPS growth this year, I would expect the following DPS increase rate in the coming October to match that of last year and land close to 5.5%.
Regarding its valuation, Honeywell is currently trading at around 22 times management’s adjusted EPS guidance at the midpoint. In my view, this is a rich multiple for the stock. While Honeywell’s overall moat, solid backlog, customer-base quality, and diversified operations do deserve a premium, the underlying growth can hardly justify a forward P/E post 20x.
In my view, a forward P/E between 16x and 18x would better reflect Honeywell’s single-digit growth expectations ahead. A higher yield would also more adequately compensate investors, as the current one at 2.05% barely adds to shareholders’ total return prospects.
Wall Street’s Take
Turning to Wall Street, Honeywell International has a Moderate Buy consensus rating based on eight Buys and six Holds assigned in the past three months.
At $221.36, the average Honeywell International price target implies 13.4% upside potential.
Takeaway
Honeywell is a diversified conglomerate with a sturdy businesses model that should keep generating enduring cash flows. The company features a promising order backlog, while management’s guidance for this year is rather encouraging.
However, despite Honeywell’s array of qualities, I believe that shares are modestly overvalued at their current levels. Thus, I would stay on the sidelines for the time being.
Discover new investment ideas with data you can trust.
Read full Disclaimer & Disclosure
