Credit Suisse analyst John Walsh downgraded Honeywell International Inc (NASDAQ:HON) to Neutral from Outperform and lowered its price target to $226 (an upside of 9%) from $243.
- Walsh believes that Honeywell is a high-quality Industrial Software company with leading businesses across each segment. However, looking across "mega" cap stocks with leverage to cyclical Aerospace recovery, the analyst sees more upside potential in General Electric Co (NYSE:GE).
- The analyst notes that Honeywell underperformed the S&P 500 in December 2021 by 2%.
- Honeywell retains significant optionality with its balance sheet, the analyst notes.
- The analyst's EPS estimate assumes deployment of excess FCF after dividend to share repo. In the current framework, he is applying a more modest 48c of earnings power based on recent M&A valuations for higher growth assets.
- The analyst cites the latest investor call that highlighted how supply chain disruptions would continue to impact 2022, especially in 1H22. He lowered the 4Q21 EPS estimate to $2.05, which represents the lower half of the company's guidance range, and reduced his 2022 EPS estimate to $8.85 driven by modestly lower organic growth, some below the line movement, and a modest reduction to the Aerospace segment margin.
- The new target price of $226 is based on 25.5x (from 27x) 2022 EPS estimate of $8.85 (from $9.00), representing a FCF yield of 3.7% on 2022CSe.
- Walsh expects a lower GTX cash payment in '22. Risks include supply chain weakness, valuation impact from noncash pension income, supplier pressure from BA/AB, and software competition.
- Price Action: HON shares are trading higher by 0.28% at $207.37 on the last check Tuesday.
