Honeywell has been treading water for the past six months, recording a small return of 3.8% while holding steady at $216.46.

Is now the time to buy Honeywell, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Honeywell Not Exciting?

We don't have much confidence in Honeywell. Here are three reasons why HON doesn't excite us and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

In addition to reported revenue, organic revenue is a useful data point for analyzing General Industrial Machinery companies. This metric gives visibility into Honeywell’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Honeywell’s organic revenue averaged 3.1% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Honeywell’s revenue to rise by 4.7%, close to its 3% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Honeywell’s margin dropped by 2.6 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Honeywell’s free cash flow margin for the trailing 12 months was 12.4%.

Final Judgment

Honeywell isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 20.2× forward P/E (or $216.46 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.

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