Decide Honeywell Over Rockwell? | Nasdaq

Given its higher valuation and prospects, we consider Honeywell stock (NYSE: HON) is a greater decide than its sector peer, Rockwell Automation stock (NYSE: ROK), an industrial automation and digital transformation options supplier, for the subsequent three years. HON inventory trades at 3.4x revenues, just like 3.3x for ROK. Whereas Rockwell has seen higher income progress, Honeywell is extra worthwhile. Each shares appear comparable from a monetary danger perspective. There’s extra to the comparability, and within the sections under, we talk about why we expect HON will outperform ROK within the subsequent three years. We evaluate a slew of things, similar to historic income progress, inventory returns, and valuation.

1. ROK Inventory Has Fared Higher Than HON

HON inventory has seen little change, transferring barely from ranges of $195 in early January 2021 to round $200 now, vs. a rise of about 10% for ROK from $235 to $260 over the identical interval. Compared, the S&P 500 has risen 45% over this roughly four-year interval.

General, the adjustments in these shares have been removed from constant. Returns for HON inventory have been 0% in 2021, 5% in 2022, and 0% in 2023, whereas that for ROK have been 41%, -24%, and 23%, respectively. Compared, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that HON underperformed the S&P in 2021 and 2023 and ROK underperformed the S&P in 2022 and 2023.

Actually, constantly beating the S&P 500 — in good instances and dangerous — has been troublesome over latest years for particular person shares; for heavyweights within the Industrials sector together with UNP, MMM, and CAT, and even for the megacap stars GOOG, TSLA, and MSFT. In distinction, the Trefis High Quality (HQ) Portfolio, with a set of 30 shares, has outperformed the S&P 500 every year over the identical interval. Why is that? As a bunch, HQ Portfolio shares offered higher returns with much less danger versus the benchmark index; much less of a roller-coaster trip, as evident in HQ Portfolio efficiency metrics.

2. Rockwell’s income progress is best

Honeywell has seen its income rise at a median annual fee of 4% from $32.6 billion in 2020 to $36.7 billion in 2023. Compared, Rockwell’s gross sales have grown at a median fee of 13% from $6.3 billion to $9.1 billion over this era. Our Honeywell Income Comparability and Rockwell Automation Income Comparability dashboards present extra perception into the businesses’ gross sales.

Honeywell stories its gross sales below 4 segments – aerospace, constructing applied sciences, efficiency supplies and applied sciences, and security and productiveness options. These companies accounted for 37%, 16%, 32%, and 15% of the corporate’s whole gross sales in 2023. The corporate has seen a gradual rise in gross sales these days for aerospace, and constructing applied sciences. Nonetheless, a softness within the warehouse automation market weighs on its security and productiveness options enterprise. A lot of the gross sales progress these days is being pushed by the aerospace section, amid larger demand for business aviation aftermarket.

Rockwell’s income progress lately is being pushed by larger software program and management section gross sales. Nonetheless, the gross sales for its clever units and software program and management segments have trended decrease, whereas lifecycle companies gross sales have improved in latest quarters. The general weak spot in the long run market demand has weighed on the corporate’s gross sales progress this yr.

If we take a look at the final twelve-month interval revenues, Honeywell has fared barely higher with 3.3% gross sales progress, vs. 2% for Rockwell. Trying ahead, we count on Honeywell gross sales to rise at a median annual fee within the mid-single-digits over the subsequent three years, pushed by continued demand for its aftermarket enterprise. In distinction, we count on Rockwell gross sales to stay flat over the subsequent three years, as a excessive single-digit anticipated decline in gross sales this yr, will offset the anticipated mid-single-digit gross sales progress within the subsequent years.

3. Honeywell Is Extra Worthwhile

Honeywell’s working margin has expanded barely from 20.4% in 2020 to 20.6% in 2023, whereas Rockwell’s working margin grew from 17.6% to 18.7% over the identical interval. Trying on the final twelve-month interval, Honeywell’s working margin of 21% fares higher than 17.2% for Rockwell. Rockwell has taken initiatives to enhance its margins, and is focusing on $100 million in value financial savings within the second half of this yr.

4. Each Shares Are Comparable From A Monetary Danger Perspective

monetary danger, each shares appear comparable. Whereas Honeywell’s 22% debt as a share of fairness is larger than 14% for Rockwell, the latter’s 4% money as a share of belongings is decrease than 14% for Honeywell. This means that Rockwell has a greater debt place, however Honeywell has more money cushion.

5. The Web of It All

We see that Rockwell has seen higher income progress and has a greater debt place. Alternatively, Honeywell is extra worthwhile and has more money cushion. Now, trying on the prospects, we consider Honeywell is the higher selection of the 2, given its superior anticipated income progress within the subsequent three years. We estimate Honeywell’s Valuation to be $236 per share, reflecting over 15% upside from the present market worth of round $201. This represents a 23x P/E a number of based mostly on our EPS estimate of $10.27 for Honeywell in 2024. The 23x determine aligns with the inventory’s common P/E ratio during the last three years.

In distinction, Rockwell inventory, at its present ranges of $258, is already buying and selling at 27x anticipated earnings of $9.68 in 2024, aligning with the inventory’s common P/E ratio during the last three years. This means that HON inventory has extra room to develop, whereas ROK inventory seems to be appropriately priced, in our view.

Whereas HON might outperform ROK within the subsequent three years, it’s useful to see how Honeywell’s Friends fare on metrics that matter. One can find different useful comparisons for corporations throughout industries at Peer Comparisons.