Honeywell International Inc. (HON) and ABB Ltd (ABB) are well-known companies in the global industrial machinery space. HON, which is headquartered in Morris Township, N.J., operates as a diversified technology and manufacturing company that provides aerospace products and services, control, sensing, and security technologies for commercial buildings, specialty chemicals, advanced materials, process technology for refining and petrochemicals, and energy-efficient products and solutions. In comparison, Switzerland-based ABB manufactures and sells electrification, industrial automation, and robotics and motion products for customers in utilities, industry and transport, and infrastructure.
Although the shortage and rising prices of iron ore compelled the machinery industry to cut back production early this year, the supply of used iron has incentivized companies to manufacture efficient power and hand tools, advanced and automated hardware, machinery, and related equipment to meet the surging demand from the resumption of industrial activities. Also, efforts to address the shortage of new iron supplies and the passage of the bipartisan infrastructure bill should drive the growth of machinery manufacturing companies in the coming months. The global industrial machinery market is expected to grow at a 3.6% CAGR to $835.34 billion by 2027. So, both HON and ABB should benefit.
While HON’s shares have declined by 1.5% in price over the past month, ABB has surged 3.5%. ABB is a clear winner with 8.5% gains versus HON’s negative returns in terms of their past six months’ performance. But which of these stocks is a better pick now? Let us find out.
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On November 18, 2021, HON announced plans to build a new advanced R&D testing facility at HON’s Brno campus in the Czech Republic for its Honeywell Intelligrated warehouse automation business to meet the growing demand for technologies that can automate and accelerate distribution centers, warehouses, and other parts of the supply chain. As its first European test and development site for its portfolio of digitally enabled technologies for supply chains, the facility should allow HON engineers to design, prototype, and test innovative warehouse automation systems and help meet rising demand in the e-commerce and logistics industries.
On November 22, 2021, ABB announced that it is providing a package of metals. industry-specific, digital-ready solutions, including medium voltage drives, MEGADRIVE-LCI controller, and converter infrastructure to enable steel manufacturer CELSA Group’s Global Steel Wire (GSW) business to modernize operations at its Santander steel mill. Using proven ABB technology will help GSW to gain optimized power consumption, a reduction in carbon emissions, and higher process efficiency.
Recent Financial Results
For its fiscal third quarter, HON’s net sales ended September 30, 2021, with an 8.7% year-over-year increase to $8.47 billion. The company’s pre-tax income came in at $1.70 billion, up 48.1% from the prior-year period. HON’s net income was $1.26 billion for the quarter, representing a 65.8% rise from its year-ago period. Its adjusted EPS increased 29.5% year-over-year to $2.02. The company had $11.09 billion in cash and equivalents as of September 30, 2021.
For its fiscal third quarter, ended September 30, 2021, ABB’s total revenues increased 6.8% year-over-year to $7.03 billion. The company’s gross profit came in at $2.29 billion for the quarter, indicating a 25.1% rise from the prior-year period. ABB’s income from operations came in at $852 million, up 1100% from the prior-year period. While its net income decreased 85.6% year-over-year to $652 million, its EPS decreased 85% to $0.32. The company had $3.71 billion in cash and equivalents as of September 30, 2021.
Past and Expected Financial Performance
HON’s revenue and EBITDA have decreased at CAGRs of 6.9% and 1.1%, respectively, over the past three years. The company’s levered free cash flow has declined at a 2.9% CAGR over the past three years.
Analysts expect HON’s EPS to grow 13.7% year-over-year in the current year and 11.9% next year. Its revenue is expected to grow 5.9% year-over-year in the current year and 6.9% next year. And the stock’s EPS is expected to grow at 11.9% year-over-year in the next year.
In comparison, ABB’s revenue and EBITDA have increased 11.8% and 21.5%, respectively, over the past three years. The company’s levered free cash flow has grown at a 108.5% CAGR over the past three years.
ABB’s EPS is expected to increase 43.9% year-over-year in the current year and 7.8% next year. The stock’s revenue is expected to grow 10.9% year-over-year in the current year and 5.4% next year. And analysts expect the stock’s EPS to grow 14.6% rate per annum over the next five years.
In terms of forward EV/Sales, HON is currently trading at 4.64x, which is 79.2% higher than ABB’s 2.59x. And in terms of forward EV/EBITDA, ABB’s 12.84x compares with HON’s 18.33x.
HON’s trailing-12-month revenue is almost 1.2 times ABB’s. HON is also more profitable, with a 25.2% EBITDA margin versus ABB’s 15.3%.
Furthermore, HON’s ROE, ROA, and ROTC of 30.4%, 7.4%, and 11.5%, respectively, compare with ABB’s 13.8%, 5.2%, and 9%.
While ABB has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, HON has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
ABB has a B grade for Growth, which is consistent with its impressive year-over-year earnings growth. ABB’s EPS has grown 844.3% from the prior-year period. However, HON’s D grade for Growth is in sync with its negative EPS growth.
In terms of Momentum, ABB has been graded a B, which is consistent with its impressive price gains over the past year. ABB has delivered 5.9% price returns over the past six months. HON’s C grade for Momentum is in sync with its mixed price performance over the past year. HON has lost 2.3% in price over the past six months.
Of the 79 stocks in the B-rated Industrial – Machinery industry, ABB is ranked #3. HON is ranked #19 of 41 stocks in the B-rated Industrial – Manufacturing industry.
Beyond what we have stated above, our POWR Ratings system has also rated ABB and HON for Value, Stability, Quality, and Sentiment. Get all HON ratings here. Also, click here to see the additional POWR Ratings for ABB.
The increasing demand for industrial machinery should bode well for both ABB and HON in the coming months. However, higher profit margins and better analyst sentiment we think make ABB a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial – Machinery industry, and here for those in the Industrial – Manufacturing industry.
Click here to check out our Industrial Sector Report for 2021
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HON shares rose $0.57 (+0.26%) in premarket trading Tuesday. Year-to-date, HON has gained 4.31%, versus a 26.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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