OWe believe 3M (NYSE: MMM) stock is currently a better choice than Honeywell (NYSE: HON) stock, given its lower valuation and better outlook. 3M is currently trading at a more attractive valuation of 2.4x trailing earnings than 3.6x for Honeywell. Even if we were to look at the P/EBIT ratio, 3M stock seems to be more attractively priced with a P/EBIT ratio of 11x, compared to 19x for Honeywell. We think this valuation gap is meaningless, and MMM stocks are likely to offer higher returns over the next few years than HON stocks, as discussed in the sections below. We compare a host of factors such as historical revenue growth, returns and valuation multiple in an interactive dashboard analysis 3M versus Honeywell: Which stock is a better bet? Parts of the analysis are summarized below. We compare these two companies because they both have a similar revenue base.
While MMM stock looks like it could gain more, our analysis on 3M v Thermo Fisher Scientific finds TMO, with a similar revenue base, an even better bet. See how 3M peers fared on important metrics. You can find other useful comparisons for companies in all industries on Peer Comparisons.
1. 3M revenue growth is stronger
- Both companies managed to see strong sales growth post-pandemic, but 3M has seen relatively faster revenue growth in recent years. 3M’s revenue fell from $31.7 billion in 2017 to $35.4 billion in 2021, while Honeywell’s revenue fell from $40.5 billion to $34.3 billion during the same period, in part due to the divestment of its transportation business, which generated nearly $3 billion in annual sales through 2018.
- 3M’s revenue growth in recent quarters has been driven by strong demand for safety and personal protective equipment, while sales of some of its other products, including office products, have been impacted during the pandemic due to many office closures, given lockdowns and shelter-in-place restrictions, resulting in lower demand. Demand for transportation products also declined due to lower car production amid chip shortages. Our dashboard on 3M’s revenue offers more details about the company’s segments.
- Regarding Honeywell, it is exposed to the aerospace sector, airlines being one of the most affected sectors during the Covid-19 crisis. This has weighed on the company’s overall performance since the start of the pandemic. Despite declining aerospace sales, the company reported overall revenue growth in 2021, driven by gains in its other segments – Building Technologies, Performance Materials and Safety & Productivity Solutions. Our Honeywell revenue dashboard provides more details about business segments.
- Going forward, Honeywell’s revenue is expected to grow faster than 3M’s. The table below summarizes our revenue forecast for MMM and HON over the next three years and indicates a CAGR of 1.6% for 3M, compared to a CAGR of 3.6% for Honeywell.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid when forecasting future revenues. For businesses negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to predict recovery at the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed for the three years preceding the Covid to simulate the return to normal conditions. For companies with positive revenue growth during Covid, we consider the average annual growth before Covid with some growth weight during Covid and the last twelve months.
2. 3M is more profitable but with higher risk
- 3M’s operating margin of 21% over the last twelve months is slightly better than 19% for Honeywell.
- If we look at recent margin growth, Honeywell is a bit ahead, with a 1% margin change in the last twelve months compared to the previous three years, compared to only 0.1% for 3M.
- Regarding financial risk, Honeywell is attractive with a risk below 3M. Its 17% debt as a percentage of equity is lower than 3M’s 21%, while its 19% cash as a percentage of assets is higher than 3M’s 10%, implying that HON has better debt and a better position. cash, and MMM stock is a relatively riskier bet.
The fillet of everything
- Both companies have a similar revenue base, but revenue growth has been better for 3M. Additionally, 3M is more profitable, trading at a comparatively lower valuation. On the other hand, Honeywell offers lower financial risk than 3M.
- But what about future expectations? Using P/S as a base, due to the large swings in both P/E and P/EBIT, we believe 3M is the better choice of the two. The table below summarizes our revenue and return forecasts for 3M and Honeywell over the next three years and indicates an expected return of 16% for 3M over this period compared to just 3% for HON, implying that investors would best to buy MMM shares on HON, based on our dashboard – 3M versus Honeywell – which also provides more detail on how we arrive at these numbers.
While MMM stock may outperform HON, the Covid-19 crisis has created many price discontinuities, providing interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Honeywell versus Eagle Materials.
What if you were looking for a more balanced portfolio instead? here is a quality portfolio which has consistently beaten the market since late 2016.
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 Cumulative monthly and cumulative annual as of 02/23/2022
 Cumulative total returns since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.