We believe 3M stock (NYSE: MMM) is a better pick than its sector peer, Honeywell stock (NYSE: HON), given its better prospects. Honeywell trades at a higher valuation multiple of 3.4x revenues vs. 1.7x for 3M due to its superior profitability and financial position. However, we believe this gap should narrow over time in favor of 3M, as discussed below.
Interestingly, HON has had a Sharpe Ratio of 0.4 since early 2017, while the figure stood at -0.3 for MMM, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Looking at stock returns, both have underperformed vis-à-vis broader markets amid rising concerns over supply-chain issues and slowing economic growth. While HON is down 12% this year, MMM is down 13%, and the S&P500 index is up 15%. There is more to the comparison, and in the sections below, we discuss why we believe that MMM will offer better returns than HON in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Honeywell vs. 3M: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. 3M’s Revenue Growth Is Better
- 3M’s revenue growth has been better, with a 2.3% average annual growth rate in the last three years, compared to -0.9% for Honeywell.
- With airlines being one of the worst-hit sectors during the pandemic, Honeywell’s aerospace revenues were weighed down during the pandemic.
- While this trend has now reversed and Honeywell is seeing a steady rise in sales for most of its businesses – aerospace, building technologies, and performance materials business – lower demand for personal protective equipment weighs on its safety & productivity solutions segment sales.
- The situation was inverse for 3M. The Covid-19 pandemic led to its revenue growth driven by high safety and personal protective equipment demand. However, this trend has now reversed. 3M is facing a decline in demand for safety and protective gear, while its consumer business, including home improvement, has seen a pickup in demand post-pandemic.
- If we look at the last twelve-month period revenues, Honeywell has fared better with 4.9% sales growth, while 3M saw its revenue decline by 5.8%.
- Our Honeywell Revenue Comparison and 3M Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, revenue for both Honeywell and 3M is expected to grow in low single-digits.
2. Honeywell Is More Profitable
- Honeywell’s operating margin has slid slightly from 18.7% in 2019 to 18.1% in 2022, while 3M’s operating margin declined marginally from 19.2% to 19.1% over this period.
- Looking at the last twelve-month period, Honeywell’s operating margin of 19.7% fares better than -8.9% for 3M.
- The decline in 3M’s operating margin can be attributed to a pre-tax charge of $10.3 billion for its proposed settlement agreement regarding PFAS (forever chemicals) litigation.
- Our Honeywell Operating Income Comparison and 3M Operating Income Comparison dashboards have more details.
- Looking at financial risk, Honeywell fares better with its 17% debt as a percentage of equity, lower than 28% for 3M, and its 14% cash as a percentage of assets, higher than 9% for the latter, implying that HON has a better debt position and more cash cushion.
3. The Net of It All
- We see that Honeywell is more profitable and has a better financial position. On the other hand, 3M has seen better revenue growth and is available at a lower valuation multiple.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe 3M is the better choice of the two, given its attractive valuation.
- Honeywell’s stock trades at 3.5x revenues vs. the last five-year average of 3.4x, and 3M stock trades at 1.7x revenues vs. the last five-year average of 3.4x.
- Our Honeywell Valuation Ratios Comparison and 3M Valuation Ratios Comparison have more details.
- It should be noted that 3M stock was weighed down due to ongoing litigation related to faulty earplugs and the use of forever chemicals. The company is focused on settling these litigations, and the overall cost will likely be lower than some analysts anticipated. [1] As such, the valuation multiple will likely be revised upward, boding well for its stock.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 3% for Honeywell over this period vs. a 17% expected return for 3M, based on Trefis Machine Learning analysis – Honeywell vs. 3M – which also provides more details on how we arrive at these numbers.
While MMM may outperform HON stock in the next three years, it is helpful to see how Honeywell’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Honeywell vs. Amkor.
With higher inflation and the Fed raising interest rates, among other factors, HON stock has seen a fall of 12% this year. Can it drop more? See how low Honeywell stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
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