On Friday, Morgan Stanley initiated coverage on Honeywell International (NASDAQ:HON) with an Equalweight rating and a price target of $210. The firm expressed caution regarding the company's near-term recovery prospects and growth in the coming years.
According to the analyst, Honeywell is experiencing lower-than-desired organic growth and faces risks of negative revisions due to its under-exposure to key industrial mega-trends.
The analyst pointed out that consensus expectations for Honeywell's short-cycle business lines to recover sharply in the second half of 2024 to 2025 might be overly optimistic. Morgan Stanley's outlook suggests that Honeywell could continue to see mid-single-digit declines in the first half of 2024, contrasting with the consensus model of mid-single-digit-plus growth.
The firm's cautious stance is based on indicators that imply potential extended headwinds due to Honeywell's significant exposure to certain sectors like US Warehouse, US Retail, and Global non-residential, where leading indicators are still negative.
In terms of Honeywell's longer-cycle exposure, such as Aerospace Technology and Building Solutions, Morgan Stanley predicts challenges in sustaining double-digit growth. This is due to tougher comparisons and potential channel destocking, with Aerospace and Defense channel inventories appearing elevated amid ongoing supply chain concerns, an issue that stands out against broader US industrial trends.
Morgan Stanley's analysis suggests that Honeywell may struggle to achieve its targeted organic growth of 4-7% and even fall short of the consensus forecasts of 5-6% growth. Instead, the firm models a more conservative 3-4% organic growth for Honeywell in 2025-26. This assessment reflects a view that Honeywell's valuation may not return to historical levels due to the outlined growth challenges and market trends.
In other recent news, Honeywell International Inc (NASDAQ:HON). has announced a CFO transition plan with Michael Stepniak set to replace Greg Lewis, following the release of the company's fourth-quarter and full-year financial results for 2024. Stepniak will transition into his new role as Senior Vice President and CFO at a date approved by the company's Board of Directors, while Lewis will take on new responsibilities as Senior Vice President, Honeywell Accelerator.
Honeywell has also reported strong Q2 2024 financial results, surpassing its adjusted earnings per share guidance and hitting the upper range of its organic sales guidance. The company's aerospace sector, including commercial aerospace, defense and space, and Building Solutions businesses, drove this growth.
In addition, Honeywell has completed the acquisition of CAES Systems Holdings LLC in a $1.9 billion all-cash transaction, marking a significant expansion of its defense and space portfolio. The company has also issued $3.5 billion in senior notes to manage its capital structure and fund various business operations.
RBC Capital Markets has maintained a Sector Perform rating on Honeywell's stock, adjusting its price target in response to the company's recent downward revision in its 2024 guidance.
InvestingPro Insights
As Morgan Stanley casts a cautious eye on Honeywell International's growth prospects, real-time data from InvestingPro provides additional context for investors. Despite the concerns raised, Honeywell has demonstrated financial resilience. The company's market capitalization stands at a robust $131.87 billion, and it has maintained a steady dividend, increasing it for 13 consecutive years. This commitment to shareholder returns is reflected in a current dividend yield of 2.13%, with a recent growth of 4.85% in dividends, as of the last twelve months leading up to Q2 2024.
Furthermore, Honeywell's price-to-earnings (P/E) ratio is 22.95, with a slight adjustment to 22.64 for the last twelve months up to Q2 2024. While this indicates a high valuation relative to near-term earnings growth, it's worth noting that analysts predict the company will remain profitable this year. Honeywell's stock is known for low price volatility, which might appeal to investors seeking stability in their portfolio. An InvestingPro Tip suggests that Honeywell is a prominent player in the Industrial Conglomerates industry, which may offer a degree of resilience amidst market fluctuations. For investors interested in further analysis and tips, InvestingPro offers additional insights on Honeywell at https://www.investing.com/pro/HON, with a total of 9 more InvestingPro Tips available.
Investors should also consider Honeywell's moderate level of debt and its high revenue valuation multiple, which may influence the company's ability to navigate through the uncertain economic landscape highlighted by Morgan Stanley. With these metrics in mind, stakeholders can better assess Honeywell's financial health and future prospects in line with Morgan Stanley's analysis.
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