Over the past six months, Honeywell’s stock price fell to $193.58. Shareholders have lost 14.9% of their capital, which is disappointing considering the S&P 500 has climbed by 14.4%. This might have investors contemplating their next move.
Is now the time to buy Honeywell, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Honeywell Not Exciting?
Even though the stock has become cheaper, we're cautious about Honeywell. Here are three reasons you should be careful with HON and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into Honeywell’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Honeywell’s organic revenue averaged 3.6% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Honeywell’s revenue to drop by 3.3%, a decrease from its 4.1% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Honeywell’s ROIC averaged 4 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Honeywell isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 18.8× forward P/E (or $193.58 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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