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Shares of Honeywell (NASDAQ:HON) continue to outperform many industrial conglomerates as management is on top of the league, deserving the ability to run a conglomerate.
In February of this year, I called the performance not well enough, as the 2021 performance and anticipated performance in 2022 were a bit underwhelming despite a diversified focus on several long-term secular growth trends.
The company has actively been repositioning its business in recent years, as this transformation and low leverage were compelling, yet valuations were a touch too high for me.
Back To Early 2022
Honeywell has seen a tougher 2020 for obvious reasons, a year in which sales fell 11% to $32.6 billion, with operating earnings down a fifth to $7.6 billion, as earnings per share fell from $8.41 to $6.72 per share.
The company was hit hard by its exposure to the aerospace industry, the largest business with an 18% fall in sales to $11.5 billion. This business is complemented by a $9.4 billion performance materials and technology segment, a $6.5 billion safety and productivity solution business and a $5.2 billion building technologies business. Each of these segments has a sound long-term positioning, carefully orchestrated by management.
Net debt of $7 billion was equal to reported EBITDA, although net debt would increase to $10 billion if one includes pension liabilities and asbestos liabilities. The company called for 2021 sales to be up between 1-4% with earnings per share seen up 7-13%. As it turned out, the company did end up posting $34.4 billion in sales in 2021 with adjusted earnings reported at $8.09 per share.
For 2022, the company guided for modest growth in sales and earnings, with earnings seen at a midpoint of $8.55 per share on $35.9 billion in sales, as this translated into a 22-23 times multiple based on shares trading at $192 per share earlier this year. This modest performance, in combination with an initial move higher in interest rates, made me a bit cautious despite a great positioning to trends like carbon capture, warehouse automation, plastic recycling, etc.
Doing Well
Since the start of the year, shares of Honeywell have traded in a $170-$220 range, now trading towards the absolute higher end of the range. After a rather uneventful first quarter, the company maintained the full-year guidance for this year.
The stronger dollar means that the midpoint of the full-year sales guidance was cut to $35.8 billion, a hundred million reduction from the previous guidance, albeit that the lower end of the earnings guidance was hiked by five cents to $8.55 per share.
The company announced a twenty cents hike in the annual dividend to $4.12 per share in September, hiking the quarterly dividend payout by five cents to $1.03 per share in order to make its yield a bit more competitive with interest rates rising throughout the year.
Honeywell cut the midpoint of the sales guidance to $35.55 billion alongside the third quarter results, marking a quarter of a billion cut in the sales guidance on the back of a strong dollar. At the same time, Honeywell hiked the midpoint of the earnings guidance to $8.75 per share, as this hike stands in sharp contrast to many peers and other industrial names in this environment.
Net debt is pretty stable at $8 billion, around $10 billion if pension and asbestos liabilities are included, as the financial net leverage position is less than the anticipated EBITDA this year.
Doing Very Well
The reality is that proactive management, positioning the business to long-term secular trends, is resulting in handsome returns. This comes in as the business has traditionally avoided leverage, as the company has avoided (environmental) liabilities. Notably, the latter is an interesting observation, as Honeywell has at times spun off quite some underperforming companies which carried quite some environmental liabilities.
This has shielded the mothership well, as many of these spun-off firms have seen tough times, being saddled with implicit leverage and liabilities following their separation. The company is even doing the opposite now, actively holding stakes in very promising businesses on the balance sheet, which includes a slight majority stake in Quantinuum, its quantum computing potential play.
The reality is that even if I use the current earnings number of around $8.75 per share, is that valuations have only expanded further to 25 times earnings, backed by solid performance, yet this comes amidst rising interest rates as well. After all, the earnings yield is just at par of risk-free rates here.
This makes me very cautious here, as Honeywell continues to do fine and might be the best-positioned conglomerate out there. This means that the risk-reward remains too demanding, despite a great performance in a tough environment here, supported by the strong secular positioning of many of its business lines.
Given all these discussions above, I am keeping a very cautious stance on Honeywell here, seeing no reason to get involved.
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