Honeywell Is Overvalued

Sep. 28, 2020 6:34 AM ETHoneywell International Inc. (HON)20 Comments
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  • HON's Q2 revenue and EBITDA in the double-digit percentage range.
  • Headwinds for Aerospace will likely continue as global passenger demand is in free fall.
  • Cost takeouts helped preserve margins, and the company has ample liquidity.
  • At nearly 17x EBITDA, HON is overvalued. Sell the stock.
  • This idea was discussed in more depth with members of my private investing community, Shocking The Street. Get started today »

Source: ForbesSource: Forbes

The coronavirus pandemic led to shelter-in-place policies and practically shut down business activity. That particularly hurt the industrial businesses of Honeywell International (NASDAQ:HON). Consumer spending declined and global travel demand fell hard, leading to a global recession. U.S. Q2 GDP fell over 30%. In Q2 Honeywell reported revenue of $7.5 billion, down 19% Y/Y. Each of the company's key product segments experienced declines.

Honeywell Q2 2020 revenueAerospace revenue fell 28% Y/Y as global travel demand was in free fall. Within the Aerospace segment, commercial aviation and aftermarket sales fell 39% and 54%, respectively. Defense and space revenue actually grew 7%. Global passenger demand fell over 90% shortly after the pandemic materialized. Moody's does not expect passenger demand to recover to pre-pandemic levels for a few years. This will likely create more headwinds for Aerospace, which was 34% of total revenue, down from 38% in the year-earlier period.

Each of the company's other product segments also experienced revenue declines. Of note is that Performance Materials and Technologies (30% of total revenue) has customers that operate in the oil and gas industry. Demand destruction amid the pandemic caused oil prices to plummet in February and March. Supply cuts have driven Brent oil into the $42 range, which may not be robust enough to spur more E&P. Schlumberger (SLB) recently rang the alarm on North America E&P; it announced (1) a major restructuring to wring out costs and (2) the sale of its hydraulic fracking business, reducing exposure to North America. Along with Aerospace, I expect Honeywell's Performance Materials and Technologies division to face serious headwinds going forward.

Margins Fell

The decline in scale was bound to hurt margins. Aerospace previously had the healthiest segment profit margins. In Q2 2019, Aerospace had segment profit margins of 26%; they fell to 21% in Q2 2020. This compared favorably to Honeywell's blended

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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