Honeywell vs. 3M: Which Industrial Stock is a Better Investment?

Honeywell International Inc. (HON) and 3M Company (MMM) are two well-known companies in the industrial space. HON operates as a diversified technology and manufacturing company worldwide. The company operates through four segments — Aerospace; Honeywell Building Technologies; Performance Materials and Technologies; and Safety and Productivity Solutions. MMM develops, manufactures, and markets various products worldwide.

The company also operates through four business segments — Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. It offers its products through e-commerce platforms and traditional wholesalers, retailers, jobbers, distributors, dealers, and directly to users.

The industrial sector has been recovering with the reopening of economic activities as there has been solid progress on the vaccination front. Rising demand for advanced equipment, machinery, and supplies should drive the sector’s growth. So, both HON and MMM should benefit. In terms of the past year’s performance, HON is a winner with a 34.9% gain versus MMM’s 13.4% return. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On September 27, 2021, HON acquired Performix Inc., a manufacturing execution system (MES) software provider for the pharmaceutical manufacturing and biotech industries. Adding Performix's industry-leading manufacturing execution system software will further enhance HON’s ability to deliver a leading integrated software platform to pharmaceutical and biotech manufacturers that assures faster compliance, improved reliability, and better production throughput at the highest levels of quality.

On September 27, 2021, MMM’s Scotch-Brite Brand and Phylagen, a biotech company specializing in optimizing indoor microbial life, launched Scotch-Brite Clean Scan, the world's first consumer home cleaning efficacy test. Clean Scan checks for microbial levels in the home's common areas, providing lab-analyzed and personalized reports to help people better understand the cleanliness of their homes. Both companies expect to witness high demand for this test kit in the upcoming months.

Recent Financial Results

HON’s net sales for its fiscal second quarter that ended June 30, 2021, increased 17.8% year-over-year to $8.81 billion. The company’s total segment profit came in at $1.79 billion, indicating a 29.5% improvement year-over-year. Its operating income came in at $1.60 billion, up 57% from the prior-year period. HON’s adjusted net income came in at $1.42 billion for the quarter, representing a 58.8% year-over-year improvement. Its adjusted EPS increased 60.3% year-over-year to $2.02. As of June 30, 2021, the company had $11.43 billion in cash and cash equivalents.

For its fiscal second quarter that ended June 30, 2021, MMM’s net sales increased 24.7% year-over-year to $8.95 billion. The company’s adjusted operating income came in at $1.97 billion for the quarter, representing a 40% rise from the prior-year period. MMM’s adjusted net income came in at $1.52 billion, up 45.4% from the year-ago period. Its adjusted EPS increased 43.1% year-over-year to $2.59. The company had $4.70 billion in cash and cash equivalents as of June 30, 2021.

Past and Expected Financial Performance

HON’s net income and EPS have grown at CAGRs of 48% and 51.9% over the past three years, respectively. The company’s total assets have grown at a 2.2% CAGR over the past three years.

HON’s EPS is expected to grow 28.8% year-over-year in the current quarter ending September 30, 2021, 14.1% in the current year, and 13.6% next year. Its revenue is expected to grow 13.7% year-over-year in the current quarter and 7.8% in the current year. Analysts expect the stock’s EPS to grow at a 12.7% rate per annum over the next five years.

In comparison, MMM’s net income and EPS have grown at CAGRs of 10.3% and 11.8%, respectively, over the past three years. The company’s total assets have increased at a CAGR of 9.5% over the past three years.

Analysts expect MMM’s EPS to decline 2.8% year-over-year in the current quarter ending September 30, 2021, and increase 14.2% in the current year and 7.1% next year. Its revenue is expected to improve 4.9% year-over-year in the current quarter, 9.5% in the current year, and 3.5% next year. The stock’s EPS is expected to grow at an 8.9% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, HON is currently trading at 2.44x, 1.7% higher than MMM’s 2.40x.

In terms of forward EV/Sales, HON’s 4.6x compares with MMM’s 3.36x.

Profitability

MMM’s trailing-12-month revenue is significantly higher than what HON generates. MMM is also profitable, with a 29% EBITDA margin versus HON’s 24.6%.

Also, MMM’s ROE, ROA, and ROTC values of 46.6%, 10.9%, and 15.4% compare favorably with HON’s 27.6%, 7.1%, and 11%, respectively.

POWR Ratings

While MMM has an overall grade of C, which translates into a Neutral rating in our proprietary POWR Ratings system, HON has an overall grade of B, equating to Buy rating. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both MMM and HON have a C grade for Value, consistent with their slightly higher-than-industry valuation ratios. MMM’s 2.40x non-GAAP forward PEG is 52.1% higher than the 1.58x industry average. HON has a non-GAAP forward PEG of 2.44x, 54.5% higher than the industry average of 1.58x.

HON has a B grade for Sentiment, which is consistent with favorable analyst estimates. Analysts expect HON’s EPS to grow 29% year-over-year in the current quarter ending September 30, 2021, to $2.01. However, MMM’s D grade for Sentiment is in sync with analysts’ relatively lower estimates. Its EPS is expected to come in at $2.36 for the current quarter ending September 30, 2021, representing a 2.8% year-over-year decline.

Of the 83 stocks in the A-rated Industrial - Machinery industry, MMM is ranked #57. On the other hand, HON is ranked #13 out of 45 stocks in the A-rated Industrial - Manufacturing industry.

Beyond what we’ve stated above, our POWR Ratings system has also graded HON and MMM for Growth, Stability, Momentum, and Quality.

Get all of MMM’s grades here. Also, click here to see additional grades for HON.

The Winner

With ongoing solid demand, as rising investments drive the industrial sector’s growth, HON and MMM should benefit. However, we think better earnings growth prospects make HON 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.

HON shares were trading at $215.11 per share on Tuesday afternoon, down $2.79 (-1.28%). Year-to-date, HON has gained 2.42%, versus a 17.31% rise in the benchmark S&P 500 index during the same period.

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.

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