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Is Honeywell Stock a Buy?

By Lee Samaha - Updated Apr 15, 2021 at 2:52PM

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Assessing the investment case for a high quality industrial conglomerate.

Wall Street is falling in love with Honeywell International (HON 0.65%) stock. That's the key conclusion drawn from the latest round of analyst upgrades and price target hikes from heavyweights like J.P. Morgan, Deutsche Bank, Barclays, and Morgan Stanley. What's going on, and should investors follow Wall Street's lead?

Honeywell is well set for 2021

The company's prospects are improving this year, and there's anecdotal and hard industry evidence that many of its end markets will grow in 2021. Honeywell's business portfolio was hit hard by the pandemic, and as the recovery takes form, it's highly likely to be a significant beneficiary.

A man under a stock price chart.

Image source: Getty Images.

It's a good idea to look at Honeywell in terms of its segments to understand why. The table below shows their relative importance, how they got hit in 2020, and the revenue growth outlook for 2021 given in January's fourth-quarter earnings presentation. I think there's a good chance that management will be upgrading at least some of its guidance outlook on the first-quarter earnings call on April 23.

Honeywell International Segment

2020 Segment Profit 

2019 Segment Profit 

Change

2021 Organic Revenue Growth Outlook

Aerospace

$2.904 billion

$3.607 billion

(19.5%)

Flat to low-single-digit

Honeywell Building Technologies (HBT)

$1.099 billion

$1.165 billion

(5.7%)

Low-single-digit

Performance Materials and Technologies (PMT)

$1.851 billion

$2.433 billion

(23.9%)

Plus or minus low-single-digit

Safety and Productivity Solutions (SPS)

$907 million

$790 million

14.8%

Double-digit

Total*

$6.665 billion

$7.739 billion

(13.9%)

1% to 4%

Data source: Honeywell presentations. Segment results include corporate costs.

Aerospace

Honeywell is arguably the best-placed aerospace-heavy industrial company. The reason being that it has a relatively high share of revenue from space and defense.

Also, around a third of its commercial aviation revenue comes from business aviation (business jets). The latter is currently doing much better than the general commercial aviation market. Business jet flights in 2021 are currently running significantly ahead of 2019 levels right now. That's a level likely to be ahead of management's expectations when it sets aerospace guidance because Honeywell's Global Business Aviation outlook in the fall called for a return to the 2019 level "by the summer of 2021."

The interior of a business jet

Image source: Getty Images.

Going back to the more typical year of 2019, the aerospace segment's share of revenue from space and defense was up in the high 30% range. That should give investors comfort because it's been a relatively stable part of the aerospace market.

Turning to the last piece of Honeywell's aerospace jigsaw puzzle, there are signs the commercial aviation market is more robust than many had expected it would be in 2021.

It's also worth noting that commercial aviation aftermarket revenue tends to be almost double its commercial original equipment (OEM) market. The former will probably recover first -- airlines will fly more planes before purchasing more of them -- so Honeywell is in a good position.

All told, don't be surprised if management raises full-year aerospace revenue guidance.

Honeywell Building Technologies

The HBT segment has been a cause of debate in recent times. On the plus side, the company's exposure to building controls and management systems means it's a leader in the fight to create cleaner, healthier buildings in a post-COVID world. Honeywell's smart building technologies also help building owners with energy efficiency and productivity. On the other hand, the commercial building market continues to suffer the pandemic's impact.

Commercial buildings.

Image source: Getty Images.

Still, CEO Darius Adamczyk recently said he expects HBT to have a strong year with an acceleration in growth in 2022 and 2023. Meanwhile, according to thefly.com, Morgan Stanley analyst Joshua Pokrzywinski believes there will be a commercial buildings supercycle driven by commercial building owners retrofitting. 

Performance Materials and Technologies

Turning to PMT, history suggests the recent stability in the price of oil will lead to increased investment in process solutions. Meanwhile, Honeywell UOP (refining catalysts and absorbents) will do well with a recovery in industrial production, as will advanced materials. The good news is that the closely watched gauge of U.S. industrial production, the Institute for Supply Management's purchasing managers index (PMI), is currently at a multi-year high. For reference, a reading above 50 indicates growth.

US ISM Manufacturing PMI Chart

Data by YCharts

Safety and Productivity Solutions

The PMI strength also bodes well for the SPS segment, particularly with its more economically sensitive solutions such as Internet of Things (IoT) sensors and barcode scanners, and mobile computers. Meanwhile, there's little sign of a slowdown in the torrid growth rates at Honeywell Intelligrated (e-commerce warehousing automation).

Is Honeywell a buy?

All told, there's reason to believe that all four of Honeywell's segments will improve in 2021, and the company remains one of the highest quality operators in the industrial sector.

Trading on a forward price-to-earnings multiple of 25.5 times earnings, Honeywell is not exactly cheap. However, it's still an attractive stock for long-term holders. Don't be surprised if analysts are upgrading the stock again after the upcoming earnings report. Honeywell is about to start firing on all cylinders.

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Honeywell International Inc.
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