Why Did Honeywell Aerospace Stock Drop on Thursday?
Key Points
Honeywell Aerospace's earnings inched higher in its first quarter as an independent company.
The stock trades at a rich valuation, and needs to grow faster to deserve it.
Honeywell Aerospace (NASDAQ:HONA) shares tumbled 10.5% through 10:30 a.m. ET Thursday despite beating earnings forecasts last night.
Heading into Honeywell's Q3 report, analysts expected the airplane engines and parts manufacturer to earn only $1.86 per share on a bit less than $4.6 billion in sales. In fact, Honeywell earned $2.21 per share on more than $4.6 billion -- and then the stock sold off anyway.
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Honeywell Aerospace Q3 earnings
So what went wrong with Honeywell Aerospace last night? Well, to be honest, while Honeywell beat expectations, its performance was still a little ho-hum. Sales grew only 2% year over year, and net profit was up just 1%.
Still, CEO Jim Currier pointed out that the results were "above our expectations [for the company's] first quarter as a stand-alone company, increasing sales and adjusted EBIT sequentially and year over year." Honeywell was helped by accelerating rates of commercial aircraft production among its customers, which drove up sales in its commercial original equipment division by 7%.
Problem is, that's Honeywell's smallest division. Commercial aftermarket and defense and space sales are both much bigger businesses, and those grew only 2% and 1%, respectively.
What's next for Honeywell Aerospace stock
Things are looking up for Honeywell Aerospace as it enters its second quarter as an independent company. Honeywell has won more than $20 billion in new contracts this year, enough new business to more than replace its $13.5 billion in year-to-date revenue, giving the company a book-to-bill ratio of about 1.5x.
However, it's only generating free cash flow at an annualized rate of about $2.6 billion. Trading at 20x free cash flow, Honeywell needs to capitalize on its book-to-bill and grow faster to deserve its current premium valuation.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Honeywell Aerospace. The Motley Fool has a disclosure policy.