Emphasis On Automation And AI Partnerships Will Fuel Future Success

Key Takeaways

• Honeywell's strategic acquisitions and divestitures aim to strengthen financial performance and enhance future revenue and earnings potential.
  
• Focus on automation, future aviation, and energy transition, backed by partnerships, is expected to drive long-term growth and margin expansion.
  
• Supply chain disruptions, project delays, and macroeconomic challenges threaten Honeywell's revenue growth, margin expansion, and earnings across multiple segments.

Catalysts

Engages in the aerospace technologies, building automation, energy and sustainable solutions, and industrial automation businesses in the United States, Europe, and internationally.

• Honeywell is accelerating its move towards profitable organic growth through product innovation and strategic commercial initiatives. They have recorded significant order volumes, such as $1 billion in UOP, which should positively impact future revenue growth.
  
• The company is enhancing its operational efficiency through its Accelerator operating system and the Honeywell Forge IoT platform, creating new recurring revenue streams. This should aid in improving both top-line growth and net margins.
  
• Honeywell's portfolio optimization strategy, including planned divestitures like PPE and the anticipated spin-off of Advanced Materials, is expected to strengthen financial performance, increase cash generation, and offer a more attractive proposition for investors. This suggests positive long-term impacts on earnings.
  
• The recent strategic acquisitions and strong backlog growth reflect potential for increased future revenues. Honeywell has deployed over $9 billion in capital for acquisitions fitting critical segments like aerospace and energy, which are expected to contribute to higher revenue and earnings performance going forward.
  
• The company's emphasis on evolving with three megatrends—automation, future aviation, and energy transition—alongside partnerships, such as the newly announced AI collaboration with Google Cloud, aims to drive long-term organic growth and margin expansion, positively impacting future earnings.

Honeywell International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Honeywell International's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.0% today to 17.4% in 3 years time.
• Analysts expect earnings to reach $7.9 billion (and earnings per share of $13.02) by about December 2027, up from $5.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2027 earnings, down from 26.7x today. This future PE is greater than the current PE for the US Industrials industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 2.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Honeywell International Future Earnings Per Share Growth

Risks

• Sales performance was below expectations due to delays in project-led businesses, short-cycle demand not improving as anticipated, and supply chain disruptions, potentially impacting revenue growth targets.
  
• The Industrial Automation segment experienced a sales miss due to underperformance and disruptions, including natural disasters, which could pressure net margins and earnings if such issues persist.
  
• The company faces challenges in accelerating short-cycle revenue growth, especially in its Industrial Automation segment, which might lead to a slower pace of revenue recovery and margin expansion.
  
• Honeywell is impacted by macroeconomic factors, including geopolitical tensions and market uncertainties, which could affect its future earnings and revenue projections.
  
• The outlook for certain segments like Aerospace may be tempered by supply chain issues and project postponements, impacting expected earnings and margin trajectories.

Valuation

• The analysts have a consensus price target of $246.81 for Honeywell International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $196.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $45.2 billion, earnings will come to $7.9 billion, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of $233.13, the analyst's price target of $246.81 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.