When a caller asked about Honeywell Aerospace Inc. (NASDAQ:HONA) during the October 5 episode of Mad Money, Jim Cramer delivered a strongly negative assessment of management, as he said:
The company has no credibility in my eyes, none whatsoever. You know, if it were a sports team and someone said that, we would all be nodding our heads and say, “Yeah, no credibility here.” Here you’re never supposed to say that about a company. You’re supposed to say, “Who was Cramer to even say that?” I’ve been… a business person and a successful one, and I don’t like anything I’ve seen from these guys. They have no credibility, and I have the right to say it because I have credibility.
Cramer’s criticism of the company was also blunt in a previous episode, but the problems behind his view went beyond the stock itself, which you can read about here.
Aftermarket Demand Offers Some Support
Honeywell Aerospace Inc. reported second-quarter sales of approximately $4.5 billion, up 5% year over year. Commercial aftermarket revenue increased 8% to approximately $2 billion, while backlog rose 9% to $18.2 billion. Those figures show that customer demand continued to grow despite the company’s operating difficulties. A new Saudi arms deal may not move the company’s results by itself, but it adds an interesting piece to the company’s defense business. Its significance becomes clearer when you look at what Honeywell is actually supplying.
The valuation also highlights a more cautious view than investors take of several aerospace peers. Honeywell Aerospace trades at approximately 19.2x forward earnings, compared with 24.9x for RTX and 36.9x for GE Aerospace. The companies have different product mixes, but the discount shows that HONA is already being valued less generously than these established competitors. That leaves room for a recovery if operating performance improves. However, a lower multiple is only attractive if the earnings estimates behind it prove achievable. It is worth noting that Honeywell Aerospace was dealing with the same supply bottlenecks that prompted GE to spend billions on a major acquisition. But Honeywell had a different approach to gaining more control over its supply chain.
Reduced Guidance Raises the Execution Bar
The company’s second-quarter update contained a significant setback. Management reduced its full-year organic sales growth outlook to 4% – 5% from 7% – 9%, while lowering its pro forma standalone adjusted EBIT forecast to $4.35 billion – $4.45 billion from $4.65 billion – $4.75 billion. Supply-chain constraints contributed to the revised outlook. Quarterly adjusted EBIT declined 7% to $995 million. The result included approximately $100 million of separation-related costs and inventory obsolescence, highlighting the expenses accompanying its transition to an independent company. Honeywell Aerospace Inc. completed its separation on June 29.
Cramer’s criticism of management is his judgment. The measurable concern for investors is whether Honeywell Aerospace can improve delivery performance and meet its revised forecasts after reducing expectations so early in its standalone history.
An Initial Look at Institutional Ownership
Insider Monkey’s second-quarter data showed 74 hedge funds holding Honeywell Aerospace Inc.. No comparable first-quarter figure was supplied because the separation occurred near the end of the second quarter. Short interest stood at 1.68% of the float. The ownership count provides a starting point, but it does not establish how much of that ownership resulted from active buying rather than shares received through the separation. The relatively small short position also contrasts with Cramer’s unusually forceful criticism.
Honeywell Aerospace still has growing demand and a lower valuation than several major peers. What it needs now is a more dependable operating record. Meeting the reduced outlook would give investors a reason to reconsider the discount; another disappointment would make that argument much harder.
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