The following article may be the source for a quiz question on a future fantastical industrial sector-focused game show. Which two industrial companies have raised their earnings guidance on every possible earnings call over the last three years, with the result being one stock up 131% and the other down 10%? The answer is nVent Electric (NVT 1.68%) and Honeywell International (HON 0.22%). That's a trivia question; the more serious question is whether either is a buy right now.
Raising guidance matters
Underpromising and overdelivering matters in investing. Its importance goes beyond merely setting a reliable track record; it also implies that a company is structuring its operations efficiently and it has the opportunity to invest for growth.
The chart below shows how each company raised full-year guidance on every earnings call since 2021 and beat the third-quarter guidance in the full-year results in 2021 and 2022. For reference, I've taken the midpoint of the guidance ranges to simplify matters.
Data source: Honeywell and nVent presentations.
nVent Electric and the electrification of everything
The two companies have a bit more in common than just raising guidance. nVent CEO Beth Wozniak -- leader of a rare CEO/CFO female duo in the industrial world -- was formerly the president of Honeywell's environmental and combustion controls business, and CTO Aravind Padmanabhan spent two decades in technology leadership roles at Honeywell.
It's a grounding that's served Wozniak well as she's led the electrical connection and protection products maker to generate super returns for investors.
The company is a play on the growth in the electrification of everything megatrend. It's a compelling secular trend driven by the need to invest in everything electrical, from data centers to transmission and distribution (not least for renewable energy), electric vehicle charging, industrial automation and digital technology, smart buildings/infrastructure, etc.
nVent's products help ensure safety and regulatory compliance and are essential to electrical installation investments made in the industries discussed.
nVent continues to grow
As such, nVent continues to churn out growth, with management expecting organic sales growth of 4% to 6% in 2023, with EPS growth of 19% to 21%. In addition, Wozniak has demonstrated a willingness to strengthen nVent's position in the electrification of everything trend with the recent $1.1 billion acquisition of ECM Industries. It's a complementary acquisition, given that ECM provides electrical connectors, tools, test instruments, and cable management systems.
While the deal value might not seem much, recall that nVent's market cap was around $3.9 billion at the start of 2021 and still stands at just $8.9 billion. An equivalent acquisition for Honeywell would mean a deal worth $15 billion -- a point I'll return to.
While the substantial rise in nVent's share price has increased its valuation, the stock still stands at less than 17 times its estimated 2024 earnings and continues to look like a decent value for investors.
Honeywell's underperformance
The industrial giant's underperformance might seem surprising, given its history of raising guidance, but it comes down to a few reasons:
- Its guidance hikes haven't been nearly as much as nVent's, with Honeywell's full-year 2021 and 2022 beating the initial guidance by just 3.3% and 2.5%, respectively, compared to nVent's 20.2% and 11.6%.
- The reality is that Honeywell started 2021 with a relatively high valuation (see the price-to-free-cash-flow multiple charts below) and remains on one now.
- There's a sentiment that, although Honeywell is an excellently run company, management has not been anywhere near as active as it could be in improving growth.
Data by YCharts.
The industrial conglomerate's structure has served it well in recent years, as parts of its business have provided valuable support while others have been weaker. Moreover, the company has a host of organic growth initiatives in areas like sustainable technology, quantum computing, and air taxis/drones, not to mention its ongoing investment in digital initiatives.
However, a crucial part of being an industrial conglomerate is using cash flow and financial leverage to acquire or internally develop new businesses. It's a vital part of a constantly evolving industrial conglomerate's raison d'etre and why shareholders put their money to work in equity -- management is supposed to generate a better return on your money than you can do yourself.
Honeywell's conservative balance sheet means it's set to end 2023 with just $11.2 billion in net debt compared to earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $9.5 billion. The company has the firepower and plenty of industries to look into making deals.
What Honeywell's management needs to do
That said, Darius Adamcyk's 2016-2023 tenure as CEO didn't result in any multibillion-dollar acquisitions -- even when Honeywell had a strong balance sheet and the market declined in 2020 -- and certainly nothing near the relative scale of the nVent acquisition discussed above.
New CEO Vimal Kapur's first earnings call saw him claiming, "I want to make my contribution in my tenure" toward improving Honeywell's growth and that "We are actively working more outbound activities in M&A and remain very optimistic." Investors will hope to see that, so the company can grow into its valuation because incrementally beating guidance and nudging full-year higher hasn't proven enough in recent years.
In contrast, nVent's guidance-busting performance has led its management to take a more proactive approach, and shareholders look set to enjoy the ongoing benefit as the stock continues to look like a good value.
