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Honeywell (HON) Displays Solid Prospects Amid Headwinds

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Zacks Equity Research
·3 min read
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On Mar 3, we issued an updated research report on Honeywell International Inc. HON.

In the past six months, this Zacks Rank #3 (Hold) stock has returned 23.9% compared with the industry’s growth of 27%.

Existing Business Scenario

Honeywell is well poised to benefit from strength across its defense and space business, supported by stable U.S. government defense budgets. In both third and fourth quarters of 2020, its defense and space business reported double digit organic sales growth on a year-over-year basis. Also, signs of recovery in business aviation aftermarket is likely to be advantageous. Moreover, solid demand for warehouse automation products and robust backlog level are likely to support its Intelligrated business.

Also, Honeywell’s strong cash flow position adds to its strength. For 2021, it expects free cash flow to be between $5.1 billion and $5.5 billion. In addition, it remains committed to rewarding shareholders through share buyback programs and dividend payouts. Notably, in 2020, the company repurchased shares worth $3,714 million and paid out dividends worth $2,592 million. Further, in September 2020, it announced a 3.3% hike in its quarterly dividend rate.

Moreover, the company’s Ballard Unmanned Systems buyout (October 2020) is expected to strengthen its prospects in the unmanned aerial systems market. The buyout of Rocky Research in the same month is likely to have bolstered prospects of its existing offerings in the energy storage, power and thermal management, and power generation arenas. In addition, its agreement to acquire Sparta Systems (anticipated to close by the first quarter of 2021), will help in strengthening its position in digital transformation, industrial automation and enterprise performance management solutions space.

However, headwinds across Honeywell’s commercial original equipment business due to lower air transport, slowdown in original equipment build rates and lower business jet demand are likely to continue affecting its revenues in the near term. Also, persistent weakness in its IoT and gas sensing businesses weighs on its top-line performance.

Also, the company’s high-debt profile remains a concern. Exiting 2020, its long-term debt was $16,342 million, reflecting an increase of 47.1% on a year-over-year basis. Any further rise in debt levels can increase the company’s financial obligations.

Stocks to Consider

Some better-ranked stocks are Danaher Corporation DHR, Chart Industries, Inc. GTLS and Griffon Corporation GFF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danaher delivered a trailing four-quarter earnings surprise of 19.86%, on average.

Chart Industries delivered a trailing four-quarter earnings surprise of 30.8%, on average.

Griffon delivered a trailing four-quarter earnings surprise of 115.48%, on average.

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