The last time I examined Honeywell International Inc. (HON, Financial), I said there were multiple reasons that investors should be bullish on the company. At that time, however, shares were trading above their GF Value, which did not offer much margin of safety.
Since then, the company reported quarterly earnings results that were very good, with most businesses showing growth year over year. Management raised earnings and organic revenue growth guidance for the year as well.
Despite this, shares of Honeywell are down for the year.
Given the company continues to perform well, it appears shares of Honeywell are offering a much better entry point at the moment. Let’s dig deeper to see why.
Earnings highlights
Honeywell reported first-quarter earnings results on April 27. Results came in ahead of the market’s expectations. Revenue grew nearly 6% to $8.9 billion, topping estimates by $360 million. Organic growth was 8%. Adjusted earnings per share totaled $2.07, which compared to $1.91 in the prior year and was 15 cents more than anticipated.
Once again, most reporting segments performed well. Organic growth for the Aerospace business was higher by 14% to $13.1 billion, driven by commercial aviation growth. Defense was also higher for the period.
The Performance Materials & Technologies division grew sales 15% to $2.7 billion. Process solutions and higher demand for fluorine products aided results. This was the fourth consecutive quarter of double-digit gains.
Sales in Honeywell Building Technologies increased 9% to $1.5 billion. Building projects also had its fourth consecutive double-digit growth, while fire products remained strong.
Safety & Productivity Solutions was the lone segment to decline during the period, falling 11% to $1.5 billion. Gains in sensing and safety technologies was more than offset by weaker performance in automation projects.
The segment margin expanded by 90 basis points to 22%. The Aerospace margin declined 80 basis points to 26.6%, while Performance Materials & Technologies fell 20 basis points to 20.6%. These declines were more than offset by gains elsewhere. Honeywell Building Technologies’ margin expanded 170 basis points to 25.2% and Safety & Productivity Solutions improved 270 basis points to 17.2%.
Following first-quarter results, management raised its guidance for 2023. Revenue is projected to be in a range of $36.5 billion to $37.3 billion, up from $36 billion to $37 billion previously. Organic growth is now expected to be higher by 3% to 6%, up from 2% to 5% previously. Adjusted earnings per share are projected to be in a range of $9 to $9.25 compared to $8.80 to $9.20 at the beginning of the year.
Key takeaways
Many of the reasons for optimism that I found at the end of last year are still in place. Guidance for the quarter had already been high, but Honeywell delivered revenue growth, margin expansion and adjusted earnings per share that all easily exceeded the high end of the range.
Next, it is important to note that Honeywell continues to see positive results in most businesses. This has led to organic growth that ranges from the high single-digits to the low double-digits. The company has now posted four consecutive quarters of organic growth within this range. This level of strength speaks to the demand for products. To reinforce this point, the backlog grew 6% to a new company record $30.3 billion.
As with prior quarters, three of four segments are seeing high rates of growth.
Importantly, Aerospace, the largest segment within the company, continues to rebound from the worst of the Covid-19 pandemic. This is led by commercial aviation, which has posted eight straight quarters of double-digit gains. Also noteworthy is that the defense business returned to growth following several quarters of weakness. With the main drag on the segment’s results now actually acting as a tailwind, this segment is likely to continue to see high growth rates. And while not yet back to pre-pandemic levels in terms of revenue, the company noted that the Aerospace backlog was particularly strong during the period.
Segment margin continues to expand even as there was a decline in Aerospace and Performance Materials & Technology, showing that Honeywell continues to run a very profitable business.
This is expected to continue for the remainder of the year, which is why the company raised its forecast for 2023.
Valuation analysis
The last time I looked at Honeywell, the stock was above its GF Value. Following the year-to-date decline in the stock, shares are much more attractively priced.
With a recent price of $197.18 and a GF Value of $217.16, Honeywell is trading with a price-to-GF Value ratio of 0.91. Were the stock to trade with its GF Value, then investors could see a 10.1% gain from this level. This is before factoring in the 2.1% dividend yield the stock currently offers.
Honeywell has a solid GF Score of 80 out of 100, implying decent results going forward based on a historical study from GuruFocus. This score is derived from high results for profitability and momentum and middling showings for growth, GF Value and financial strength.
Final thoughts
Honeywell continues to achieve impressive results, beating estimates in the first quarter. The vast majority of the business demonstrated high levels of organic growth and the backlog reached a new level.
Many of the reasons for optimism at the end of last year remain, but the stock is now trading at a more attractive entry point. The GF Value shows the stock could have double-digit upside potential.
The combined business performance with the more reasonable GF Value could make Honeywell an enticing investment option for those looking for exposure to the industrial sector.
