2021 was a usual and unusual year for shareholders in industrial conglomerate Honeywell (HON 1.44%). On the one hand, the company raised full-year earnings guidance on every earnings call. But, on the other hand, the stock price declined a couple of percentage points on the year. So what's going on, and what can investors expect in 2022? Here's the lowdown.
What happened for Honeywell in 2021
The simple answer is that Honeywell entered the year on a lofty valuation. In such cases, the pressure will be on to outperform management's guidance to "justify" the valuation. Moreover, the increased earnings will lower the valuation provided the stock price stays the same.
Image source: Getty Images.
The table below shows the evolution of the company's full-year guidance through the year. As you can see, earnings guidance was hiked on every earnings call, and the midpoint of free cash flow (FCF) guidance in October was $5.45 billion compared to $5.3 billion in January.
To put these figures into context, Honeywell started 2021 with a share price of $212 and a market cap of $148 billion. Based on the midpoints of January guidance, it traded on 21.2 times full-year 2021 earnings expectations and 27.9 times expected FCF in 2021. Fast forward to October, and those valuations (using the same stock price and market cap) become 26.3 times earnings and 27.1 times FCF.
Given that a price-to-FCF multiple of around 20 is seen as reasonable for a mature industrial company in normal conditions, it's fair to say the company didn't do enough to justify an increase in the share price.
| 2021 |
October Guidance (Current) |
July Guidance |
April Guidance |
January Guidance |
|---|---|---|---|---|
|
Sales |
$34.2 billion to $34.6 billion |
$34.6 billion to $35.2 billion |
$34 billion to $34.8 billion |
$33.4 billion to $34.4 billion |
|
Adjusted EPS |
$8 to $8.10 |
$7.95-$8.10 |
$7.75 to $8 |
$7.60 to $8 |
|
Free cash flow |
$5.3 billion to $5.6 billion |
$5.3 billion to $5.6 billion |
$5.2 billion to $5.5 billion |
$5.1 billion to $5.5 billion |
Data source: Honeywell International
Moreover, as you can see above, there was a slight downgrading to full-year sales guidance in October. This, again, was cause for the market to be cautious over the stock. Going into more granular detail on the reason behind it, it's clear that the offender was the company's key aerospace segment.
It may seem counterintuitive, but the main reason for this is the defense business. Incidentally, General Electric also downgraded expectations for its military revenue in 2021. Both Honeywell and GE's cases came down to supply chain difficulties impacting the ability to meet demand.
That said, the rest of Honeywell's businesses have good growth momentum behind them, and the supply chain issues will likely start to resolve in 2022 while the commercial aviation market should continue its multi-year recovery. Honeywell's exposure to a resurgent business jet market is a significant plus.
|
Organic Growth-Rate Guidance in 2021 |
October |
July |
April |
January |
|---|---|---|---|---|
|
Aerospace |
Down mid-single digits |
Down low-single digits |
"Trending toward low end of range" |
Flat-to-low single digits |
|
Honeywell Building Technologies (HBT) |
Mid-single digit |
Mid-single digits |
"Trending better than expected" |
Low single digits |
|
Performance Materials and Technologies (PMT) |
Low single digits |
Low single-digit |
"Trending toward low end of range" |
Plus or minus low single digits |
|
Safety and Productivity Solutions (SPS) |
Double digits |
Double digits |
"Trending better than expected" |
Double-digit |
|
Total |
4%-5% |
4%-6% |
3%-5% |
1%-4% |
Data source: Honeywell presentations.
What about Honeywell in 2022?
Based on the current stock price and the midpoint of management's guidance, Honeywell trades on 27 times estimated 2021 earnings and 27.5 time estimated 2021 FCF. While management hasn't given formal guidance for 2022 yet, Wall Street analyst forecasts call for EPS of $8.97 and FCF of $6.03 billion in 2022, which would put the stock 24.2 times earnings and 24.9 times FCF at the end of 2022.
Whichever way you look at it, Honeywell will have to beat analyst expectations or significantly surprise the market with full-year guidance to move notably higher in 2022.
The excellent news is Honeywell has good earnings momentum. As already noted, the aerospace segment has good prospects across commercial aviation, defense, and business jets. Moreover, management's preliminary outlook for 2022 calls for strength in the price of oil to stimulate process automation and refining spending (PMT segment).
Image source: Getty Images.
The HBT segment will benefit from an ongoing recovery in nonresidential construction spending, the need for healthy, clean buildings, and continued spending on connected buildings. Finally, there's no shortage of spending on e-commerce facilities right now; good news for Honeywell's warehouse automation and productivity solutions businesses (SPS).
Is Honeywell a stock to buy?
As attractive as the company is and as positive as its growth prospects are in 2022, Honeywell will have to significantly raise expectations above the market consensus and see a decent dip in the price before it becomes a buy.
