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Generally, the industrial sector-which includes aerospace, construction, manufacturing and many other businesses, is quite vulnerable to an economic downturn. The COVID-19 pandemic has disrupted several businesses and led to huge unemployment. Its impact on industrial stocks has been drastic.
Both 3M and Honeywell have been in the news for massive production of personal protective equipment, especially N95 masks. But these industrial giants are highly diversified companies and are involved in several other businesses, most of which are struggling due to the slowdown triggered by the pandemic.
Using TipRanks’ Stock Comparison tool, we will compare these two industrial giants to see which stock is better positioned to recover faster.
3M Company (MMM)
The unprecedented surge in the demand for 3M’s N95 masks was not enough to offset the impact of COVID-19 on the sales from end markets like healthcare elective procedures, automotive OEM (original equipment manufacturers) and aftermarket, general industrial, commercial solutions and office supplies.
3M’s second-quarter sales fell 12.2% to $7.2 billion and adjusted EPS declined 16.4% to $1.78. Sales from the company’s Safety and Industrial, Transportation and Electronics, Health Care, and Consumer divisions fell 9.2%, 20.9%, 0.4%, and 6.2%, respectively. The company’s aggressive cost cuts helped in reducing costs by $400 million in the second quarter.
3M was struggling even before the pandemic and was unable to deliver strong numbers for businesses like healthcare and consumer, which are not that cyclical. As part of its restructuring efforts, the company streamlined its business segments to four instead of five, sold certain underperforming businesses like drug delivery, reduced headcount and implemented a new global operating model.
Meanwhile, 3M is investing in research and development to capture growth opportunities in air quality, automotive electrification and food safety. (See MMM stock analysis on TipRanks)
JPMorgan analyst Stephen Tusa maintained his Hold rating for 3M following the recent results. A well-executed second quarter against a challenging environment and a “stronger-than-expected bounceback” in July made him raise the price target to $159 from $154.
RBC Capital analyst Deane Dray was disappointed with the lower-than-anticipated second-quarter earnings and organic sales growth as well as the third-quarter margins outlook. However, he increased his price target to $170 from $158 for 3M stock while maintaining a Hold rating based on a potential positive inflection in July sales given a low-single-digit rise in month-to-date revenue.
3M stock has declined 7% so far this year and the average price target of $165.44 indicates a modest 1.2% rise over the next 12 months. One Buy rating, 6 Holds, and 2 Sells add up to a Hold consensus for 3M.
Honeywell International (HON)
Industrial conglomerate Honeywell provides products and solutions to a wide variety of industries ranging from aerospace, defense, to heaters and Internet of Things solutions.
Honeywell’s second-quarter sales fell 19% to $7.5 billion as the pandemic hit its major businesses though areas like defense, warehouse automation and personal protective equipment delivered a strong performance. The quarter’s EPS declined 40% Y/Y to $1.26.
The company’s Aerospace business, which is its largest division by sales, plunged 28% due to lower demand as commercial air travel came to a standstill due to the COVID-19 outbreak. However, the strength in the defense and space business saved the segment to some extent.
Honeywell Building Technologies sales were down 19%. Performance Materials and Technologies sales also fell 19% hit by the pandemic as well as the softness in the oil and gas sector.
Safety and Productivity Solutions sales dropped 1% Y/Y as weakness in sensing and Internet of things, productivity products, and gas sensing, was partially offset by robust demand for personal protective equipment and double-digit growth in Intelligrated. Notably, Intelligrated, which provides warehouse automated solutions, experienced a 300% rise in bookings as e-commerce spiked since the pandemic.
Honeywell expects its third-quarter organic sales to be down 15% as Aerospace, Performance Materials and Technologies, and Building Technologies sales are expected to fall by over 25%, 10%, and 10%, respectively.
Amid this crisis, the company is looking for prospects in providing customer solutions in areas like e-commerce, health and safety. It is also making cost cuts in the range of $1.4 billion to $1.6 billion this year, of which 60% to 70% would be permanent cost reductions.
Following the better-than-feared results, JP Morgan analyst Stephen Tusa maintained his Buy rating for the stock and raised his price target for Honeywell to $185 from $177. The analyst believes that the company’s “growth vectors moving forward are underappreciated,” including the connected portfolio and automation products for warehouses and buildings.
However, on August 11, RBC Capital analyst Deane Dray downgraded Honeywell to Hold from Buy and also lowered the price target to $158 from $166. While the analyst recognizes that the company is among the best-in-class multi-industry operators, he is concerned about the weakness in commercial aero and oil and gas markets.
Dray summarized, “Honeywell is likely to lag in a cyclical rebound. Patient investors may ultimately be rewarded.” (See HON stock analysis on TipRanks)
The Street has a cautiously optimistic Moderate Buy rating for Honeywell International with 10 Buys and 5 Hold ratings. Honeywell stock has declined about 10% year-to-date. Analysts expect an upside potential of 3.3% with a 12-month price target of $164.62.
It will take quite some time for both 3M and Honeywell to recover to pre-COVID levels as their key businesses are closely aligned to economic recovery. While 3M has a higher dividend yield of 3.6% compared to Honeywell’s 2.3%, Wall Street consensus and long-term prospects appear to make Honeywell a more favorable stock pick right now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment