Honeywell's Key Catalysts 'Largely Played Out,' RBC Says

Industrial conglomerate Honeywell International Inc. (HON) stock dropped following a "soft downgrade" by RBC Capital Markets.

After Honeywell's solid run in 2017, RBC Capital Markets analyst Deane Dray said there may still be some margin upside but key catalysts have already played out, including the CEO transition and the spin-off announcements. He downgraded the stock to Sector Perform from Outperform.

"HON shares were up 32% in 2017, outperforming peers by 13 percentage points (S&P 500 up 19%) with the stock meaningfully re-rating higher as the new CEO Darius Adamczyk steered Honeywell smoothly through the management transition and embraced the 'under-promise, over-deliver' operating mantra," wrote Dray in a Jan. 3 research note. "Our take is that the current 9% relative valuation discount to peers is no longer compelling."

Honeywell shares fell by about 0.9%, with above-average trading volume, to $152.35 at 1:30 p.m. EST on Wednesday. RBC set a $158 price target on the stock, which implies the stock will rise slightly.

Dray said that the Morris Plains, N.J.-based company needs to deliver better results to support the current share price yet there is limited near-term upside. He also said that the approximately 60% of sales that are short-cycle could be an "underappreciated risk."

The RBC analyst, however, recognized the potential for pushback to the downgrade, noting that Honeywell's earnings momentum and its relative "Safe Haven" status would support shares in a macro slowdown. There is also "meaningful capital allocation optionality from repatriated cash, as investors wait expectantly for Darius [Adamczyk] to announce his first signature acquisition in Honeywell's transition to a 'software-industrial.'"

TheStreet's Jim Cramer saw the stock's weakness on Wednesday as a buying opportunity.

"We are not deterred by this valuation downgrade, especially when management has a history of 'UPOD' -- under promise, over deliver," wrote Cramer in a Jan. 3 note to Action Alerts PLUS subscribers. "We believe that expanding margins across all key segments and exposure to strong industrial end markets like aero and defense set the company up for success this year on earnings."

Honeywell International Inc. is holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells HON? Learn more now.

Honeywell expects 2018 earnings per share in the range of $7.55 and $7.80, excluding separation costs. The company is also targeting free cash flow growth of more than 20%.

For the fourth quarter of the fiscal year 2017, Honeywell is forecasting EPS of about $1.84.

There are 16 Buys and five Holds with zero Sells on Honeywell stock, according to Bloomberg data.

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