5-Star Honeywell continues to prove resilient and outperform peers on the back of strong digital transformation

Summary

Honeywell beat estimates in Q3 despite a 14% YoY drop in revenue and a 25% decrease in earnings. Aerospace (-25%), building technologies (-8%) and performance materials and technologies (-16%) got hit the hardest, while the company saw an increase defense and space, warehouse automation and personal protective equipment.

HON’s share price has gained since Friday’s earnings announcement as it continues to recover losses from its steep drop in March at the onset of the pandemic-induced shutdowns.

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Analysis

5-Star-rated Honeywell (HON) has proven resilient in the face of the economic slowdown which has aggressively hit two of its key verticals — aerospace and building materials. This resilience is partly a product of a well-executed Digital Transformation that permeates every aspect of Honeywell’s sprawling business. The company has consistently put digital front and center and continues to do so. Chairman and CEO Darius Adamczyk spoke of “continuing our transformation to a premier software-industrial company..” in HON’s earnings release.

Despite YoY earnings and revenue declines in Q3, the market continues to have confidence in the company’s future prospects in part because they continue to outperform peers—companies such as GE that have worse cyber ratings than HON. Recognizing the near-term challenges, HON highlighted quarter-over-quarter margin growth as one source of optimism. This is also a byproduct of strong digital execution characteristic of 5-Star companies.

Honeywell also noted in its 10-Q increased investments in security since March. This is something that a company with a strong balance sheet can afford to do, but it is also an indication of the C-suite’s recognition of the need to protect the company against increased cyber-attacks and an increased risk of operational disruption. Poorly rated industrial peers are not taking the same proactive approach.

As predicted earlier this year, this trend of outperformance is likely to continue as the company maintains its best-in-class Digital Transformation.

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Denis Bolshakov

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