The Zhitong Finance App learned that due to Honeywell Aerospace (HONA.US)'s first earnings report falling short of expectations, BNP (BNP) lowered its target price and warned that the stock is in a “cold house,” and it may take longer for the company to regain investor confidence.
BNP analyst Matthew Akers maintained a “neutral” rating for Honeywell Aerospace on Thursday while cutting the target price by 14% from $245 to $210. This adjustment stemmed from the company's second-quarter results falling short of expectations and a sharp reduction in full-year results guidance.
Honeywell Aerospace closed down more than 23% on Thursday after earnings release. Akers pointed out that the valuation is now close to the bottom of the aviation sector.
Akers wrote in the report: “Performance guidelines were lowered just a few weeks after the spin-off, causing the stock to fall into the 'cold house'.” He added that he will not turn optimistic until there are more clear signs that operational issues are improving.
Supply chain bottlenecks constrain growth
Honeywell Aerospace completed its spin-off with Honeywell (HON.US) in June of this year. The company attributed the underperformance of several business segments to supplier supply shortages.
Specifically, organic revenue from the aftermarket increased by 8%, sales of raw equipment increased by 6%, and revenue from the defense business increased by 3%, all lower than BNP's expectations. The decline in production and inventory scrapping contributed to lower profit performance. The adjusted profit before interest and tax (EBIT) was US$1.02 billion, lower than Akers' previous forecast of US$1.18 billion.
The company also lowered its full-year forecast. The organic growth rate is expected to drop to 4%-5% from the previous 7%-9%; the adjusted EBIT guidelines for exam preparation fell to 4.35 billion to 4.45 billion US dollars, a decrease of about 300 million US dollars from the previous forecast.
Product structure drags down profit margins
According to Akers, management attributed the weakening profitability to an unfavorable business structure — the company prioritized the delivery of original equipment over high-margin aftermarket operations; at the same time, it focused on domestic defense projects, at the expense of international orders with higher profit margins.
According to BNP, the revised guidelines mean that Honeywell Aerospace's aftermarket business growth rate in the second half of the year will remain roughly flat or increase slightly, far below the high single-digit or even higher growth levels generally achieved by peers.
Management expects that due to the base effect, the third quarter results will be basically the same as the same period last year; while the fourth quarter performance is expected to strengthen, bringing the full year results close to the revised target. The executive also said that operational performance is expected to improve in 2027.
In terms of the commercial market, the company expects large commercial aircraft to remain the main driver of growth, while demand for business aviation will remain stable. At the same time, management pointed out that geopolitical tension in the Middle East has yet to have a substantial impact on demand.
Waiting for more definitive signs of recovery
Although falling stock prices after earnings reports made Honeywell Aerospace's valuation more attractive, Akers believes investors will likely remain cautious until supply chain issues ease and aftermarket growth accelerates.
BNP has lowered its financial forecast to reflect weak quarterly performance and a lowered full-year outlook, and believes that stock prices may remain under pressure until the company shows more steady operating execution.