Honeywell (HON) is one of the standout gainers in the S&P 500 after two different analysts published very bullish reports about the stock.
Before we dig deeper, we have one programming note. There will be no Daily Rundown video Friday. For Jim's broader view of the markets, we encourage club members to watch the replay of our April Members-only conference call at the link here. We are aiming to provide an edited transcript before the end of the day.
Late Thursday analysts at Deutsche Bank upgraded their rating to a Buy and increased their price target to $244 from $222. "Despite Honeywell's attractive mid-/late-cycle end-market exposures, including leverage to a global economic 'reopening', and best-in-class quality metrics, the stock has been the worst performer in the MI/EE group YTD, after showing only average performance in 2020. We take this rare opportunity to upgrade the stock, particularly as we now see 5% and 10% upside to consensus EPS forecasts for 2021 and 2022, among the most attractive in the MI/EE group," Deutsch Bank said.
Not to be undone, analysts at JPMorgan increased their price target to a street high $250 from $200 and maintained their Overweight rating, saying that "Honeywell is as good as it gets cyclically for the next 3-4 years, while market outgrowth initiatives and non-fundamental levers, namely a best-in-class balance sheet, are materially additive."
"In our 15 years watching the Sector, we have rarely seen this positive of a setup, with a potential fundamentally synchronized growth profile for a best-in-class operator and a kicker from capital deployment," JPMorgan added. "This is all part of what we see as a potential 15%-20% EPS growth CAGR, a feat not accomplished by a $100 B+ market cap since GE in the late 90s." What a glowing endorsement from JPMorgan analyst Stephen Tusa, who is regarded as the top-ranked analyst in the sector.
Indeed, HON's performance so far in 2021 has been underwhelming and a big disappointment relative to some other industrial names for reasons that are beyond us. Maybe HON's underperformance is tied to management's highly conservative 2021 guidance that they gave back in January. Or maybe it is due to an already premium valuation in the group. However, Honeywell is one of the highest quality names in the group and we see plenty of reasons to continue owning this name thanks to the expected rebound in aerospace, the secular growth outlook of SPS with its massive backlog, breakthrough asset-light connected/software initiatives in Forge and Quantum gaining in size (and not currently reflected in the stock's multiple, according to Tusa), and the huge sum of capital that can either be returned to shareholders through buybacks or support growth through M&A. To this latter point, Deutsche Bank estimates that Honeywell has $21 billion of discretionary cash "firepower" available through 2023, representing about 14% of Honeywell's current market cap.
Today's nice move in HON has sent shares slightly over our target price and to a new record high, but we are not trimming our position. Honeywell is one of the few high-quality industrials that has not made a big move this year and it could be due for a catch-up. We will look to revise our price target after the company reports first quarter earnings on Friday, April 23rd.
And, just to briefly touch on the popular question of why we do not immediately sell a stock as soon as it hits our price target. Well, this is more of a personal choice. Within Action Alerts Plus, we aim to teach and educate our subscribers to be as intelligent long-term investors as much as possible. This has always been our foundation. When a story is good and our outlook remains positive, we want to stick with it and avoid constantly trading in and out of a name.
In other aerospace news, shares of Boeing (BA) are dipping lower after the company said in a statement here that it "has recommended to 16 customers that they address a potential electrical issue in a specific group of 737 MAX airplanes prior to further operations". Boeing added that the "recommendation is being made to allow for verification that a sufficient ground path exists for a component of the electrical power system." Reuters reported that this issue impacts a total of 90 jets.
Southwest Airlines (LUV) moved swiftly to remove 30 of its 58 737 MAX 8 aircrafts from its fleet, announcing that it will swap out the affected planes from service with others in its fleet.
Boeing's caution is sparking fears that there are still lingering issues with the 737 MAX, which was recertified by the FAA in mid-November after a 20-month grounding due to safety concerns. No matter how small, expect to see BA come under pressure any time there is an issue with the 737 MAX program because the jet is so highly scrutinized. But more importantly, the sense we are getting this morning is that the fix could take as little as hours and up to a few days at most, therefore we see no reason to change our positive view on 737 MAX orders/deliveries and we would not sell Boeing on this news.