WWe believe Honeywell (NYSE: HON) stock is currently a better choice over Rockwell Automation (NYSE: ROK) stock, despite Rockwell’s revenue growth at a faster rate in recent years. Honeywell is trading at around 4.4x sliding revenue, compared to 5.1x for Rockwell. Although both companies saw a drop in revenues due to the pandemic, Rockwell has seen a strong recovery thanks to new orders and the impact of the acquisitions of ASEM, Kalypso and Fiix. Honeywell, on the other hand, is still experiencing slower revenue growth, mainly due to its exposure to the aerospace segment, which has been one of the hardest hit companies during the pandemic. However, there is more to the comparison. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Honeywell vs. Rockwell: industry peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.
1. Rockwell’s revenue growth has been stronger
Today, Rockwell’s revenue growth has been better than Honeywell’s over the past twelve months as well as over the past three years. While Rockwell’s revenue growth has been bolstered by multiple acquisitions, Honeywell’s aerospace business has driven revenue sharply during the pandemic, and it has also divested some of its businesses, including transportation systems, which has had an impact on its revenue growth over the past three years. Honeywell’s -7% CAGR for the most recent three-year period compares to a 0.1% CAGR for Rockwell. Likewise, Rockwell’s 4.2% revenue growth over the past twelve months is much better than the -1.6% change for Honeywell.
However, now that the vaccination rate is on the rise and economies are gradually opening up, Honeywell is also seeing a pickup in demand for its aerospace business. Looking ahead, Honeywell’s revenue is expected to grow 8% year-on-year to over $ 35 billion in 2021, while Rockwell is likely to experience 12% revenue growth to $ 7.1 billion. dollars for fiscal year 2021. Rockwell is now experiencing strong demand for warehouse automation. as well as the software business, with all segments posting double-digit sales growth in the third quarter. For Honeywell, its security and productivity solutions segment outperformed its other businesses during the pandemic, with increased demand for warehouse solutions as well as security and retail products. Segment revenue jumped 35% in the second quarter, compared to an increase of 42% in the first half of 2021. This trend is expected to continue in the near term. Our Honeywell Revenue dashboard provides more information on the company’s revenue.
2. Honeywell experienced better margin growth
Unlike the pattern seen in revenue growth, Honeywell’s operating margin growth of 1.4% over the past three years is better than the -2.6% change for Rockwell. However, if we look at the period of the last twelve months, the operating margin is similar for both companies at around 18%. Honeywell’s operating margin of 17.9% in the past twelve months compares to 18.7% in 2019, before the pandemic. Rockwell’s current operating margin of 18.3% is a bit higher than Honeywell’s, and compares to 20.4% in 2019. Overall, for both companies, margins contracted, but the decline was larger for Rockwell. We expect both companies’ margins to improve in the future, driven by increased sales.
The net of everything
Now that more than half of the U.S. population is fully vaccinated against Covid-19, with a pickup in global economic activity, demand for aerospace is expected to increase in the future, which bodes well for Honeywell. For Rockwell, continued demand for warehouse automation, among other offerings, is likely to bolster its revenue growth going forward. Covid-19 proves more difficult to contain than initially thought, due to the spread of more contagious viral variants and infections in the United States are higher than they were a few months ago .
That said, Honeywell has seen better margin expansion over the past year or so, and it’s also staying close to the margins the company was seeing before the pandemic. Honeywell’s current valuation is also more attractive than Rockwell’s, with HON stock trading at around 4.4x sliding earnings, compared to Rockwell’s 5.1x. If we looked at the financial risk, Rockwell’s 5.9% debt as a percentage of equity is well below 13.0% for Honeywell, but Honeywell’s 19% cash flow as a percentage of assets is better than the number. by 11% for Rockwell, which implies that Honeywell has higher debt but better cash flow.
Overall, it looks like Honeywell is a better choice of the two stocks, with a cheaper valuation, high earnings growth, and no additional risk. Through our Honeywell Rating of $ 241 per share, based on Adjusted EPS of $ 8.05 and a P / E multiple of 30x, there is potential for a rise of more than 12% from its current levels of $ 216 .
Honeywell vs. Roper.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.