The rapid digitalization and adoption of automation led the industrial sector to witness huge demand last year. The acute labor shortages should drive the sector’s growth further in the upcoming months. The industrial automation market is expected to grow at a 7.6% CAGR to reach $233.94 billion by 2028. So, both Honeywell International Inc. (HON) and Emerson Electric Co. (EMR) should benefit.
HON and EMR are two prominent industrial companies. HON operates as a diversified technology and manufacturing company worldwide. It offers 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. EMR designs and manufactures electronic and electrical equipment, software, systems, and services. The company offers its products for industrial, commercial, and consumer markets worldwide through its network power, process management, industrial automation, climate technologies, and commercial and residential solutions divisions.
While HON lost 6% year-to-date, EMR gained 5.7%. Which of these stocks is a better pick now? Let’s find out.
Click here to check out our Industrial Sector Report for 2022
Latest Developments
On March 24, 2022, HON announced a strategic collaboration with OTTO Motors, a division of Clearpath Robotics, to deploy OTTO’s autonomous mobile robots (AMRs) in warehouses and distribution centers across North America to improve the speed, accuracy, and safety of operations.
On January 27, 2022, EMR launched new premium monitoring services for its Oversight cargo services platform, transforming billions of aggregated sensor data points from GO loggers and trackers into insights customers can utilize to manage their cold chain more effectively.
Recent Financial Results
HON’s net sales for the fiscal 2021 fourth quarter ended December 31, 2021, decreased 2.7% year-over-year to $8.66 billion. The company’s operating income came in at $1.52 billion, indicating a 9.4% year-over-year decline. HON’s adjusted net income came in at $1.45 billion, down 1.1% from the year-ago period. Its adjusted EPS increased marginally from the prior-year period to $2.09. The company had $10.96 billion in cash and cash equivalents as of December 31, 2021.
For its fiscal 2022 first quarter ended December 31, 2021, EMR’s net sales increased 7.5% year-over-year to $4.47 billion. The company’s pre-tax income came in at $1.18 billion, up 108.7% from the prior-year period. While its net earnings increased 98% year-over-year to $895 million, its adjusted EPS grew 12.9% to $1.05. The company had $4.73 billion in cash and equivalents as of December 31, 2021.
Past and Expected Financial Performance
Over the past three years, HON’s revenue, net income, and levered free cash flow have decreased at CAGRs of 6.3%, 6.4%, and 4.3%, respectively.
HON’s EPS is expected to grow 6.8% year-over-year in fiscal 2022, ending December 31, 2022, and 12.5% in fiscal 2023. Its revenue is expected to grow 5% year-over-year in fiscal 2022 and 6.8% in fiscal 2023. Analysts expect the company’s EPS to grow at a 10.5% rate per annum over the next five years.
EMR’s revenue, net income, and levered free cash flow have increased at CAGRs of 1.5%, 6.6%, and 10.8%, respectively, over the past three years.
Analysts expect EMR’s EPS to improve 22.2% year-over-year in fiscal 2022, ending September 30, 2022, and 8.6% in fiscal 2023. Its revenue is expected to grow 7.4% year-over-year in fiscal 2022 and 5.7% in fiscal 2023. Analysts expect the company’s EPS to grow at a 10.3% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, HON is currently trading at 2.36x, 31.8% higher than EMR’s 1.79x. In terms of forward EV/Sales, EMR’s 3.23x compares with HON’s 3.99x.
Profitability
HON’s trailing-12-month revenue is almost 1.9 times EMR’s. However, EMR is more profitable, with a 41.3% gross profit margin versus HON’s 32%.
Furthermore, EMR’s ROA of 7.9% compares with HON’s 7.2%.
POWR Ratings
While EMR has an overall B grade, which translates to 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 HON and EMR have a B grade for Quality, consistent with their higher-than-industry profitability ratios. EMR’s trailing-12-month ROA of 10.2% is 98.4% higher than the industry average of 5.2%. HON has an 8.6% ROA, 6.9% higher than the 5.2% industry average.
EMR has a B grade for Sentiment, consistent with analysts’ expectations of a solid increase in earnings. EMR’s EPS is expected to grow 21.6% year-over-year to $1.18 for its fiscal 2022 second quarter ended March 31, 2022. HON’s C grade for Sentiment is in sync with its lower earnings estimates. The consensus EPS estimate of $1.87 for HON’s fiscal 2022 first quarter represents a 2.6% decline from the prior-year period.
Of the 90 stocks in the Industrial - Equipment industry, EMR is ranked #17. In contrast, HON is ranked #23 of 39 stocks in the Industrial - Manufacturing industry.
Beyond what we have stated above, our POWR Ratings system has also rated EMR and HON for Stability, Momentum, Sentiment, and Growth. Get all EMR ratings here. Also, click here to see the additional POWR Ratings for HON.
The Winner
Amid concerns over growing labor shortages, the rising adoption of automated machinery and equipment should benefit both HON and EMR. However, higher profitability and lower valuation make EMR 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 - Equipment industry and here for those in the Industrial - Manufacturing industry.
HON shares were unchanged in after-hours trading Monday. Year-to-date, HON has declined -5.45%, versus a -3.52% 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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