ABB Ltd (ABB) and Honeywell International Inc. (HON) are two prominent players in the industrial machinery space. Switzerland-based ABB manufactures and sells electrification, industrial automation, and robotics and motion products for utilities, industry and transport, and infrastructure customers. It serves automotive, buildings and infrastructure, metals, chemical, data centers, food and beverage, process automation, life sciences, marine and ports, mining, energy, and utility industries. HON is a diversified technology and manufacturing company that provides aerospace products and services, control, sensing, and security technologies for commercial buildings, specialty chemicals, advanced materials, process technology for refining and petrochemicals, and energy-efficient products and solutions.
The industrial sector is going through a tough time due to deepening supply chain disruptions caused by the ongoing Russia-Ukraine war and extended COVID-19 lockdowns in China. However, U.S. industrial production increased 0.9% in March and experts expect the improvement to continue even if at a slower pace. The global industrial machinery market is expected to grow at a 3.5% CAGR by 2027. So, both ABB and HON should benefit.
HON is a winner with marginal gains over the past month versus ABB’s 8.3% loss. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On April 28, 2022, ABB’s ABB E-mobility announced signing a new global framework agreement with Shell plc (SHEL), a British multinational oil and gas company, to supply ABB’s end-to-end portfolio of AC and DC charging stations. This collaboration will help SHEL address EV charging infrastructure availability by targeting the operation of over 500,000 charge points globally by 2025; and enhance the speed of charging with ABB’s portfolio of charging stations, including its Terra 360 charger.
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On May 5, 2022, HON launched two new NIOSH-certified respiratory offerings that expanded its personal protective equipment (PPE) portfolio for healthcare professionals. The company’s DC365 Small Surgical N95 Respirator is designed to protect frontline workers who need a smaller-sized surgical N95. Its new half-mask respirator (RU8500X series) features a filtered exhalation valve and a HEPA P100 filter that allows for high-performing protection (99.9%) and provides source control to the wearer and those around them. These two products should gain widespread recognition across the industry and high demand in the coming months.
Recent Financial Results
ABB’s revenues for its fiscal 2022 first quarter ended March 31, 2022, increased marginally from the prior-year period to $6.97 billion. The company’s gross profit came in at $2.28 billion, indicating a marginal improvement from the year-ago period. Its income from operations came in at $857 million, representing a 7.5% year-over-year improvement. ABB’s net income came in at $604 million, up 20.3% from the prior-year period. Its EPS increased 24% year-over-year to $0.31. The company had $5.22 billion in cash and equivalents as of March 31, 2022.
For its fiscal 2022 first quarter ended March 31, 2022, HON’s net sales decreased yearly to $8.38 billion. The company’s operating income came in at $1.27 billion for the quarter, indicating a 15.8% year-over-year decline. HON’s adjusted net income came in at $1.32 billion, representing a 2.8% decline from the prior-year period. Its adjusted EPS came in at $1.91, indicating a marginal year-over-year decline. As of March 31, 2022, the company had $9.28 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, ABB’s revenue, net income, and EPS have increased at CAGRs of 1.1%, 29.6%, and 51.3%, respectively.
ABB’s EPS is expected to increase 8.9% year-over-year in fiscal 2022, ending December 31, 2022, and 15.1% in fiscal 2023. Its revenue is expected to grow 3.4% in fiscal 2022 and 6.8% in fiscal 2023. Analysts expect the company’s EPS to grow at a 14.6% rate per annum over the next five years.
Over the past three years, HON’s revenue, net income, and EPS have decreased at CAGRs of 5.2%, 8%, and 5.9%, respectively.
Analysts expect HON’s EPS to grow 7.9% year-over-year in fiscal 2022, ending December 31, 2022, and 12.2% in fiscal 2023. Its revenue is expected to rise 4.6% year-over-year in fiscal 2022 and 6.6% in fiscal 2023. Analysts expect the company’s EPS to grow at a 10.6% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, HON is currently trading at 3.94x, 104.2% higher than ABB’s 1.93x. In terms of forward EV/EBITDA, ABB’s 12.61x compares with HON’s 15.50x.
Profitability
ABB’s trailing-12-month revenue is almost 3.8 times HON’s. ABB is also more profitable, with a 32.9% gross profit margin versus HON’s 31.9%.
Furthermore, ABB’s net income margin of 16% compares with HON’s 15.3%.
POWR Ratings
While ABB has an overall B grade, which translates to Strong Buy in our proprietary POWR Ratings system, HON has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both ABB and HON have a B grade for Quality, consistent with their higher-than-industry profitability ratios. ABB’s 35% trailing-12-month return on common equity (ROE) is 144.6% higher than the 14.3% industry average. HON has a 28.9% trailing-12-month ROE, 102% lower than the 14.3% industry average.
ABB has been graded a C for Value, in sync with its slightly higher-than-industry valuation ratios. ABB’s 1.94x forward EV/Sales is 26.4% higher than the 1.53x industry average. HON’s D grade for Value is in sync with its overvaluations. HON has a 3.94x forward EV/Sales, 156.9% higher than the 1.53x industry average.
Of the 77 stocks in the B-rated Industrial - Machinery industry, ABB is ranked #20, while HON is ranked #45.
Beyond what we have stated above, our POWR Ratings system has graded HON and ABB for Sentiment, Growth, Stability, and Momentum. Get all HON ratings here. Also, click here to see the additional POWR Ratings for ABB.
The Winner
Increased focus on production and rising demand should help prominent industrial machinery companies ABB and HON benefit. However, relatively lower valuations and higher profitability make ABB a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial - Machinery industry.
ABB shares were trading at $28.81 per share on Friday afternoon, up $0.66 (+2.34%). Year-to-date, ABB has declined -23.35%, versus a -15.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
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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