Honeywell’s Future Looks Sweet As Investments Aim To Boost Earnings

Honeywell earnings have not grown in recent years

Shares substantially underperformed the US equity market

Investing in product lines that should boost future earnings

Wall Street consensus rating is bullish

Market-implied outlook is bullish

Honeywell (NASDAQ: HON ) shares have fallen 7.8% over the past 12 months, compared to +12.3% for the US equity market as a whole.

The poor performance reflects low expectations for earnings growth over the next several years. Honeywell is in a transition period. The technology and manufacturing giant is investing in business lines with strong expected growth and potentially higher margins (including quantum computing, battery technology, green fuels and carbon capture), but EPS growth is currently low. The question is whether it is worth investing now. Honeywell 12-Month Price History. Source: Investing.com

HON is currently trading at $194.44, 17% below the 12-month high closing price of $234.18 on Aug. 11.

The trailing three-year total return of 8.72% per year, is less than half the total return of the S&P 500 over the same period. However, over 10- and 15-year periods, the shares have provided total returns in line with the US equity market. HON Trailing Total Returns Vs. Industry Group, Equity Market Index. An examination of historical quarterly earnings explains why the Charlotte, North Carolina-based mega-cap stock has underperformed. Even though it has met or slightly exceeded expectations for an extended period, there is no growth. Note that EPS for Q4 2019 of $2.06, $2.07 in Q4 2020 and $2.09 in Q4 of 2021 are almost identical. HON Historical And Estimated Future Quarterly EPS. Source: E-Trade

With a current dividend yield of 2% and 3- and 5-year dividend growth rates of 5.8% and 7.4% , respectively, the Gordon Growth Model supports an expected total return in the range of 8%-9% per year. The consensus outlook for EPS growth over the next three-to-five-year period is 9.65% per year.

These numbers are consistent with a stable company that is increasing the dividend at a conservative pace relative to expected earnings growth. The big question is can Honeywell generate this level of expected growth?

On Oct.18, 2021 I assigned a bullish/buy rating. Since then the shares have returned a total of -10.9% compared to +2% for the S&P 500.

The company reported Q3 2021 and Q4 2021 earnings over this period, very slightly beating EPS expectations for both.

My bullish rating in October of 2021 was motivated by expectations that Honeywell would be able to break out of its earnings rut. The Wall Street analyst consensus was bullish, with a 12-month price target close to $240, about 8.7% above the share price at that time. The options market was also indicating a modestly bullish view. These positive outlooks supported my buy rating. However, the anticipated earnings growth is not yet evident, which is why the shares have declined relative to the broader market.

While most readers will be familiar with the Wall Street analyst consensus, many will not have encountered outlooks calculated from options prices. A brief explanation will explain the approach. The price of an option on a stock reflects the market’s consensus estimate of the probability that the share price will rise above (call option) or fall below (put option) a specific level (the option strike prices) between now and when the option expires. By analyzing the prices of call and put options at a range of strike prices, all with the same expiration date, it is possible to calculate a probable price outlook that reconciles the options prices. This is called the market-implied outlook and represents the consensus view among buyers and sellers of options. For readers who want a deeper dive into the market-implied outlook than the information in the previous link, I recommend this excellent free monograph from the CFA Institute.

With almost six months since my last analysis, I have updated the market-implied outlook to early 2023 and compared it with the current Wall Street consensus outlook, as in my previous analysis. Wall Street Consensus Outlook For HON

E-Trade calculates the Wall Street consensus outlook for HON by aggregating the views of 15 ranked analysts who have published ratings and price targets over the past 90 days. The consensus rating is bullish and the consensus 12-month price target is 16.1% above the current share price. Analyst Consensus Rating And 12-Month Price Target. Source: E-Trade

Investing.com ’s calculation of Wall Street consensus combines price targets and ratings from 28 analysts and it is bullish with a 12-month price target of 12.7% above the current share price. Analyst Consensus […]

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