Introduction
Honeywell International Inc. (HON) is a well-established U.S. industrial conglomerate with a market capitalization exceeding $100 billion. The company operates across multiple sectors, including aerospace, building technologies, performance materials, and industrial automation. While Honeywell is often viewed as a reliable long-term investment, its growth trajectory, valuation, and historical performance warrant closer examination.
This analysis will assess Honeywell’s historical earnings trends, stock buybacks, valuation metrics, and potential future opportunities to determine whether it presents an attractive investment at current levels.
Historical Earnings Trends & Cyclical
As an industrial company, Honeywell’s earnings are cyclical, meaning they tend to rise and fall based on economic conditions. To better understand its risk-reward profile, let’s examine how the company has performed during past downturns:
The COVID-19 Dip (2020-2021)
Like most industrial, Honeywell experienced a predictable decline in earnings due to the economic slowdown. However, the recovery was relatively quick, as stimulus measures and pent-up demand helped drive industrial production back up.
The Great Recession (2008-2009)
Earnings dropped 24%, which provides a useful reference point for future downturn scenarios. The stock price fell 61%, roughly in line with the broader market. Despite this significant price decline, the valuation at that time was still a 17x price-to-earnings (P/E) ratio, which suggests that even during a major crisis, the stock didn’t necessarily become “cheap.”
Key Takeaways from Past Downturns
Honeywell is vulnerable to macroeconomic slowdowns, which can cause earnings to decline significantly. The stock does not always become a deep value play during downturns, as it tends to trade at relatively high P/E multiples even when earnings decline. Investors should be cautious when buying at high valuations, as it leaves little margin for error if an economic downturn occurs.
Earnings Growth & Stock Buybacks: Are They Artificially Inflating EPS?
Over the past decade, Honeywell has steadily increased its earnings per share (EPS). However, a significant portion of this growth has come from stock buybacks, rather than organic business expansion.
Impact of Share Repurchases
Since before 2016, Honeywell has repurchased 17.7% of its outstanding shares. Stock buybacks artificially boost EPS growth, making the company appear to be growing faster than it truly is.
Adjusted Earnings Growth
To get a clearer picture of Honeywell’s real business performance, I prefer to adjust for the effects of buybacks. Based on historical trends:
Actual earnings growth (excluding buybacks): 4.75% per year Stock price return (pre-COVID): 4.75% per year, meaning it has only tracked inflation Dividend yield: 1.9%
What This Means for Investors
Honeywell’s earnings growth has been modest and has largely kept pace with inflation, rather than generating significant excess value. If buybacks slow down or stop, EPS growth could weaken further, reducing future stock price appreciation. The company’s dividend yield of 1.9% is not particularly high compared to other industrial, meaning investors are not compensated much for holding the stock.
Market Sentiment
Honeywell International Inc. (HON) has recently experienced notable movements in its stock performance and corporate developments, influencing market sentiment. Honeywell's shares have seen gains, contributing significantly to an overall rise in the Dow Jones Industrial Average. This uptick highlights investor confidence in the company's current trajectory.
Analyst Ratings and Price Targets
Analyst consensus positions Honeywell as a "Moderate Buy," with several buy and hold ratings. The average 12-month price target suggests a potential upside from the current price, with projections ranging from a low to a high valuation.
Corporate Developments
Honeywell has announced a leadership change and a planned spin-off of its Advanced Materials business, which will be rebranded as Solstice Advanced Materials. This unit is expected to become an independent company by late 2025 or early 2026, focusing on sustainable chemicals and materials. The move aims to enhance operational focus and potentially unlock shareholder value.
Institutional Investment Activity
Recent filings indicate that some institutional investors have adjusted their holdings in Honeywell, with certain firms reducing their positions. Such movements can influence market perceptions and stock performance. Market sentiment for Honeywell reflects cautious optimism. While recent stock performance and corporate initiatives have bolstered investor confidence, ongoing evaluations by analysts and institutional investors suggest a balanced perspective on the company's future prospects.
Valuation & Buy Price Considerations
Given its slow earnings growth, Honeywell’s valuation becomes a critical factor in determining whether it is a good investment.
Current Valuation Metrics
P/E Ratio: Historically trades between 17x-25x earnings, meaning it is often priced as a premium industrial stock. Earnings Yield: 4.17% (the inverse of the P/E ratio). Enterprise Value Adjustment: When adjusting for debt, the stock price should be increased by 16% to reflect the total cost of ownership.
When Would It Be a Buy?
Given the modest earnings growth, Honeywell does not currently present an attractive valuation. If the stock were to decline by 60%, it would become significantly more attractive from a valuation standpoint. At today’s price levels, investors are paying too much for too little growth.
Time Until Payback Analysis: How Long to Recover Your Investment?
One way to determine whether an investment is worth making is to calculate how long it would take to recover your initial investment through earnings.
Key Assumptions
Earnings Yield: 4.17% (meaning that, for every $100 invested, the company generates $4.17 in earnings per year).
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Earnings Growth Rate: 4.75% per year.
Stock Price Adjustment for Debt: 16% increase to account for enterprise value considerations.
Results of the Payback Calculation at this rate, it would take approximately 16 years to recover the initial investment purely from earnings.
Comparing to the Broader Market
The S&P 500 currently trades at a P/E ratio of around 15x, meaning it takes about 15 years for an investor to recover their investment on average. In contrast, Honeywell’s 16-year payback period suggests that it is slightly more expensive than the broader market, despite having slower earnings growth.
Final Thoughts: Is Honeywell a Buy Right Now?
Current Valuation: Expensive Relative to Growth
Honeywell does not meet my buy criteria at its current valuation. A 60% decline would make it far more attractive, bringing it in line with a reasonable payback period.
For Existing Shareholders If I already owned Honeywell, I would:
Wait to see if the company announces any strategic moves, such as a spin-off or restructuring, which could impact valuation. Consider taking profits if the price remains high and reinvesting in higher-growth opportunities. Monitor earnings trends closely, particularly in the event of an economic downturn.
For Potential Buyers
Honeywell is not compelling at today’s prices due to modest growth and an extended payback period. If the stock drops significantly, it could become a good value opportunity. Investors looking for better growth potential should consider alternatives in the industrial sector.
Conclusion: More Attractive at a Lower Price
Honeywell remains a high-quality industrial company, but its current valuation does not offer compelling long-term upside.
Lack of real earnings growth makes it difficult for the stock to outperform over the long run. The company’s reliance on buybacks to boost EPS means organic growth is weaker than it appears. At today’s prices, there are better investment opportunities elsewhere. For now, Honeywell is a hold or sell, not a buy—unless a significant price drop presents a better entry point.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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