General Electric (GE +6.82%) and Honeywell (HON +3.32%) had a disappointing 2021 and underperformed the S&P 500. Then again, the list of companies with heavy exposure to commercial aviation in the midst of a global pandemic that beat the market was pretty short. The resurgence of COVID-19 cases caused flight cancellations in 2021. Moreover, supply chain difficulties led to Honeywell missing out on "hundreds of millions of dollars worth of shipments" in the fourth quarter according to CFO Greg Lewis on the last earnings call. However, if you can look beyond the negative near-term headlines, stocks in the aviation sector look like a good value. So let's look at which of these industrial giants is a better value for 2022.
General Electric
If you are looking for aviation plays specifically, it might make more sense to look at some purer ways to play the theme. GE and Honeywell both have heavy aerospace exposure, but they also offer investors the benefit of having some diversity in the end markets.
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The case for buying GE stock rests on two arguments.
First, the sum of the parts of GE's businesses (aviation, healthcare, renewable energy, and power) is likely worth more than the current market cap. Hence, the company plans to break up GE into three separate companies to release significant value for investors. Moreover, splitting the three companies could result in the new companies performing better as stand-alone businesses. For reference, GE plans for all three businesses to have investment-grade debt upon separation.
Second, CEO Larry Culp has been very vocal about his aim to see GE generate more than $7 billion in free cash flow (FCF) in 2023. Based on that aim, GE looks to be a good value. For example, assuming the current market cap of $104.6 billion, FCF of $7 billion would be equivalent to 6.7% of GE's market cap (alternatively, it's a price-to-FCF multiple of 15 times) in 2023. Theoretically, GE could pay all of that out in dividends and still grow the business.
Honeywell International
If this were a beauty contest, there's no doubt Honeywell would be the winner, and the market already knows it. The company has some of the lowest sales, general, and administrative costs as a share of revenue in the industrial sector, and it commands a valuation premium over its industrial peers, including GE.
In a nutshell, Honeywell is excellently run, and its exciting mix of businesses means investors are already willing to invest in the company. However, its aerospace segment suffered disappointment in 2021 alongside GE Aviation and other commercial aerospace businesses. For example, Honeywell started the year expecting its full-year aerospace organic sales to grow in the "flat to low single-digit" range. Unfortunately, the updated full-year guidance called for a mid-single-digit decline by the third quarter.
However, Honeywell has three other segments and is a testimony to the benefits of diversity; these segments have outperformed initial expectations. In addition, they all have good near- and long-term growth prospects.
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Honeywell Building Technologies has a growth opportunity from the need to create healthier, cleaner buildings in the wake of the pandemic, and it's a leading beneficiary of the drive to develop smart connected facilities and infrastructure.
The safety and productivity solutions segment has a couple of exciting businesses. Its Intelligrated (e-commerce warehouse automation) and productivity solutions (barcode scanners, mobile computers, printers, etc.) segments help workers gather data and improve the efficiency of companies' supply chains.
Finally, the performance materials and technologies segment should benefit from improvements in spending in the process industry (process automation and refining catalysts and absorbents) now that the price of oil has recovered from the pandemic lows of 2020.
GE or Honeywell?
As noted above, both companies have considerable upside prospects in 2022 and beyond. However, they also have some downsides. For GE, the chief risk is that weakness in commercial aerospace could hurt its earnings prospects and therefore derail its breakup plans. After all, GE needs GE Aviation to generate the cash flows to help pay down debt and ultimately ensure that all three of the resulting companies have investment-grade debt levels.
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For Honeywell, the chief downside is that its stock already trades at a premium. As such, any disappointment -- such as what happened in 2021 with aerospace -- will lead to pressure on the stock. Meanwhile, according to Wall Street analysts, Honeywell will generate $6.7 billion in FCF in 2023, worth around 4.7% of its current market cap. Alternatively, it's a price-to-FCF multiple of 21.
All told, if you are confident in an ongoing recovery in commercial aviation, albeit with an uneven trajectory, then GE looks the better value right now. Of course, Honeywell is the better business, but valuations still matter.
