Investors love a good turnaround stock from companies which are well-known with a long history of operations and with lots of value to unlock. The problem is that not all turnarounds actually manage to turn around. This was supposed to be the case for Honeywell International Inc. (NYSE: HON). Something has gone wrong.

When Honeywell reported earnings last week, it managed to beat bottom line earnings expectations but sales were soft. Now it appears that Wall Street just doesn’t seem to think that enough is being done. Speed doesn’t seem to be of concern either. Honeywell’s stock has been stuck for about four years now.

There was some brief excitement that Honeywell is planning to spin-off its Advanced Materials unit into a new independent public company. That unit is focused on specialty chemicals and materials in the brands of Aclar, Solstice, Spectra and Hydranal — for products in fluorine, industrial-grade fibers, electronic materials, healthcare packaging and so on. While the deal would be a tax-free traditional spin-out, it doesn’t look like it will occur until late in 2025 or even into early 2026. There is the “Speed” problem.

By the company’s own reckoning that would be worth roughly $10 billion alone, with about $3.8 billion in current revenues and an EBITDA margin of 25% or more. That leaves the future of Honeywell tied to Automation, Aviation and also Energy and Sustainability Solutions. In short, the remaining three units would generate $35 billion in 2024 revenues and the current market cap is about $142 billion.

The spin-off looked interesting at first, but the problem is that it just wasn’t big enough to entice “special situation” investors who are going to get an entirely new core company and a SpinCo that is large enough to unlock major value here. There is the “Enough” problem. Honeywell is also a “blue chip” as a Dow Jones Industrial Average pedigree company.

ANALYSTS & ECONOMICS

The overall U.S. economy has held up for the most part, but manufacturing has lagged with weak purchasing manager readings for nearly two years. Inflation, supply chains, and wages also created problems for companies which actually have to manufacture goods. There have been three fresh analyst downgrades after the earnings report.

On October 24, BofA Andrew Obin downgraded Honeywell to Neutral from Buy. Obin also cut his $250 prior price objective down to $230 based on uncertainty in the economically sensitive manufacturing segments. His report noted that the timing of the short cycle recovery remains uncertain at the same time its long cycle performance is lacking consistency. And BofA cut its FY/25 forecast to $11.13 EPS (-4%) as a result of less certainty and it trimmed earnings estimates 5% to $12.17 EPS in 2026 well. BofA’s investment rationale sums up a strong degree of frustration:

Honeywell has had more mixed execution in the volatile macro environment. We see limited visibility into both the company’s long and short-cycle businesses. Until the company has more visibility into its end markets, we see limited near-term upside to shares.

On October 25, R.W. Baird’s Peter Arment downgraded Honeywell to Hold from Buy. He also trimmed his prior $223 price target down to $217. While a 3% price target is not much, Armet sees ongoing weakness in the segments that are more economically sensitive within manufacturing.

On October 28, Wolfe Research downgraded Honeywell to Peer Perform from Outperform and the firm removed its $233 price target in the call. Nigel Coe, Wolfe’s analyst following the company, is less optimistic that the headwinds facing the company will be resolved into 2025. Now there are even risks of another wave of earnings (per share) revisions in 2025.

AND OTHER ANALYST CALLS

On top of three formal analyst downgrades, Honeywell has by and large seen its price targets cut. While there was an exception, it was hardly full of enthusiasm.

JPMorgan had just downgraded Honeywell about two-weeks prior to earnings, down to Neutral from Overweight while raising its target to $235 from $225. The firm has since trimmed that target nominally lower as you will see below.

Other analysts maintained their ratings but adjusted their price targets since the earnings report, seen as follows:

• Wells Fargo (Equal Weight) target up to $215 from $207
• JPMorgan (Neutral) target down to $233 from $235
• Citigroup (Buy) target down to $244 from $248
• Barclays (Overweight) target down to $229 from $232
• RBC Capital Markets (Sector Perform) target down to $213 from $214

IN THE END…

Honeywell was trading at $220.34 prior to earnings. Its stock had even risen to $222 earlier that week, up about 10% since late in August. Now the stock is down under $206 and what was a hoped for turnaround now seems murky.

Honeywell’s stock is now down about 1.6% for 2024 (YTD) even though it is up 17% from a year ago. The stock is also effectively still trading at the same share price as the late-2020 during the Covid recovery period and it peaked at roughly $235 in 2021. Its dividend yield is about 2.1% at the current share price.

Maybe Honeywell should just choose the route of GE’s breakup rather than spinning off less than 10% of its business in a big restructuring. Would it be better off as four distinct companies?

DISCLAIMERS & NOTICES

Tactical Bulls has highlighted brokerage research reports and independent reports for formal ratings and for formal price targets. Those ratings and targets are the opinion of each firm named. They may not represent the opinion of Tactical Bulls.

Tactical Bulls does not have any formal rating nor any formal price targets on Honeywell. In no way should this be interpreted as investment advice nor is this a recommendation to buy or sell any of the companies mentioned.

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