Shares of Honeywell Aerospace Inc (HONA.US) are in focus after its first quarterly report as an independent company fell short of expectations, prompting BNP Paribas to cut its price target and warn that the stock is "in the doghouse," potentially requiring a longer period to regain investor confidence.
BNP analyst Matthew Akers maintained a "neutral" rating on Honeywell Aerospace on Thursday while lowering the price target by 14% to $210 from $245. The adjustment follows second-quarter results that missed estimates and a sharp reduction in full-year guidance. Following the earnings release, Honeywell Aerospace shares closed over 23% lower on Thursday. Akers noted that the valuation is now near the bottom range of the aerospace sector.
"Guiding lower just weeks after the spin-off puts the stock in the doghouse," Akers wrote in a report. He added that he is refraining from turning bullish until there are clearer signs that operational issues are improving.
Supply chain bottlenecks restrain growth
Honeywell Aerospace completed its separation from Honeywell International (HON.US) in June. The company attributed the underperformance of several business segments to supplier shortages. Specifically, aftermarket organic revenue grew 8%, original equipment sales rose 6%, and defense revenue increased 3%, all below BNP's expectations. Lower production volumes and inventory write-downs weighed on profitability, with adjusted EBIT coming in at $10.2 billion, below Akers' previous estimate of $11.8 billion.
The company also lowered its full-year outlook, reducing organic growth guidance from 7%-9% to 4%-5%, and adjusted pro-forma EBIT guidance to $43.5 billion-$44.5 billion, a reduction of roughly $3 billion from the prior forecast.
Product mix impacts margins
Akers said management attributed the weaker profitability to an unfavorable business mix, as the company prioritized original equipment deliveries over higher-margin aftermarket sales and focused on domestic defense projects at the expense of more profitable international orders. BNP noted that the revised guidance implies Honeywell Aerospace's aftermarket business will be roughly flat or slightly up in the second half of the year, significantly below the high single-digit or higher growth rates commonly seen among peers.
Management expects third-quarter results to be roughly flat compared to the same period last year due to base effects, while the fourth quarter could see stronger performance, bringing full-year results closer to the revised targets. Executives also indicated that operational performance is expected to improve by 2027. In the commercial market, the company expects large commercial aircraft to remain the main growth driver, while business jet demand will stay stable. Management also noted that geopolitical tensions in the Middle East have not yet materially impacted demand.
Waiting for clearer recovery signals
Although the post-earnings stock decline makes Honeywell Aerospace's valuation more attractive, Akers believes investors are likely to remain cautious until supply chain issues ease and aftermarket growth accelerates. BNP has lowered its financial forecasts to reflect the weak quarterly performance and reduced full-year outlook, and expects the stock to remain under pressure until the company demonstrates more robust operational execution.
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