Honeywell (HON)

Industrial conglomerate Honeywell (NASDAQ:HON) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 7.9% year on year to $9.82 billion. On the other hand, the company’s full-year revenue guidance of $40.05 billion at the midpoint came in 0.7% below analysts’ estimates. Its non-GAAP profit of $2.51 per share was 13.6% above analysts’ consensus estimates.

Company Overview

Originally founded in 1906 as a thermostat company, Honeywell (NASDAQ:HON) is a multinational conglomerate known for its aerospace systems, building technologies, performance materials, and safety and productivity solutions.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Siemens AG (NYSE:SIE), Johnson Controls International (NYSE:JCI), Emerson Electric (NYSE:EMR), and Raytheon Technologies (NYSE:RTX).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Honeywell grew its sales at a sluggish 1.6% compounded annual growth rate. This was below our standards and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Honeywell’s annualized revenue growth of 4.4% over the last two years is above its five-year trend, but we were still disappointed by the results.

Honeywell also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Honeywell’s organic revenue averaged 2.8% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Honeywell reported year-on-year revenue growth of 7.9%, and its $9.82 billion of revenue exceeded Wall Street’s estimates by 2.5%.

Looking ahead, sell-side analysts expect revenue to grow 4% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Honeywell’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 35.6% gross margin over the last five years. Said differently, Honeywell paid its suppliers $64.38 for every $100 in revenue.

Honeywell’s gross profit margin came in at 38.5% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Honeywell has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20.6%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Honeywell’s operating margin rose by 1.4 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Honeywell generated an operating profit margin of 20.1%, down 2.9 percentage points year on year. Since Honeywell’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Honeywell’s EPS grew at a weak 3.5% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.6% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Honeywell’s earnings can give us a better understanding of its performance. As we mentioned earlier, Honeywell’s operating margin declined this quarter but expanded by 1.4 percentage points over the last five years. Its share count also shrank by 9.1%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Honeywell, its two-year annual EPS growth of 5.7% was higher than its five-year trend. Accelerating earnings growth is almost always an encouraging data point.

In Q1, Honeywell reported EPS at $2.51, up from $2.34 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Honeywell’s full-year EPS of $10.05 to grow 5.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Honeywell has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 13.3% over the last five years.

Taking a step back, we can see that Honeywell’s margin dropped by 3.2 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Honeywell’s free cash flow clocked in at $346 million in Q1, equivalent to a 3.5% margin. This result was good as its margin was 1.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Honeywell hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 21%, splendid for an industrials business.

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. On average, Honeywell’s ROIC decreased by 1.3 percentage points annually 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.

Honeywell reported $9.66 billion of cash and $32.83 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $10.52 billion of EBITDA over the last 12 months, we view Honeywell’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $803 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Honeywell beat analysts’ organic revenue expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. On the other hand, its full-year revenue and EPS guidance both slightly missed. Overall, we think this was a mixed quarter. The stock traded up 2.2% to $204.98 immediately after reporting.

Updated: July 10, 2025 at 11:34 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Honeywell.

Honeywell isn’t a terrible business, but it doesn’t pass our quality test. To begin with, its revenue growth was weak over the last five years. And while its impressive operating margins show it has a highly efficient business model, the downside is its organic revenue growth has disappointed. On top of that, its weak EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.

Honeywell’s P/E ratio based on the next 12 months is 22.3x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $242.42 on the company (compared to the current share price of $237.25).