Key Points
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Honeywell and General Electric both disassembled their industrial businesses.
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Honeywell Aerospace and GE Aerospace are two of the key businesses that resulted from the corporate breakups.
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GE Aerospace appears to be performing very well right now, while Honeywell Aerospace is off to a slower start.
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GE Aerospace (NYSE: GE) is being led by the same CEO who orchestrated the breakup of General Electric into three separate businesses. Honeywell Aerospace (NASDAQ: HONA) is not being led by the CEO who oversaw the breakup of that iconic industrial conglomerate. That doesn’t mean Honeywell Aerospace is a bad company, but it’s worth noting that GE Aerospace is achieving more impressive results right now. If you are looking at these two aerospace companies, here’s why you might want to focus your attention on GE Aerospace.
Big changes as two iconic companies reshape themselves
Wall Street goes through phases. Sometimes creating conglomerates is all the rage; other times, the focus is on breaking companies into smaller pieces. Recently, the industrial sector has been focused on simplification, leading to the breakup of both General Electric and Honeywell, two iconic names in the sector. That’s how GE Aerospace and Honeywell Aerospace were born.
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Both, however, are still fairly new businesses on a stand-alone basis. That creates a big problem when it comes to analyzing either business. For example, as of this writing, GE Aerospace’s price-to-sales ratio is 6.3x, and its price-to-earnings ratio is 36x. Is that high or low? If you compare those valuation metrics to the five-year averages of 2.2x and 28.5x, respectively, they look high. But those averages include years when GE Aerospace was still the old General Electric.
For comparison, Honeywell Aerospace’s P/S ratio is 2.7x, and its P/E is 44x. There are no longer-term averages because the stock was created by Honeywell’s corporate breakup. That said, based on the P/S ratio, it appears to be a more attractive value than GE Aerospace, but the opposite is true when you look at the P/E. There’s no easy answer to which is the better value.
GE Aerospace is executing better right now
That said, there is a clearer difference when you look at each aerospace company’s third-quarter financial performance. GE Aerospace reported that revenues advanced 16% year over year in the quarter. Sales in the company’s commercial business rose 21%, while sales in its defense business jumped 7%. Roughly 75% of GE Aerospace’s commercial business is related to services, with services accounting for 50% of its defense business (services are 70% of overall sales), creating a reliable foundation of recurring income. Honeywell Aerospace saw sales increase 2%. Its commercial original equipment sales jumped 7%, commercial aftermarket sales rose 2%, and its defense business’s sales improved by 1%.
To be fair, GE Aerospace has been a stand-alone business for longer. So Honeywell Aerospace is still working through the complexity of becoming a stand-alone business. In some ways, it is still finding its footing, while GE Aerospace is clearly running at full stride. But for an investor, that’s not a subtle point.
Given the relative success GE Aerospace is seeing right now compared to Honeywell Aerospace, you can understand why the CEO of GE chose to stay on and run GE Aerospace. As an investor, GE Aerospace appears to be the better-positioned business. It is also much larger, with a market cap of around $320 billion compared to Honeywell Aerospace’s roughly $50 billion.
Honeywell Aerospace needs a bit more time
It probably wouldn’t be a mistake to buy Honeywell Aerospace. However, you would be buying it while it was still in the middle of a big transition. GE Aerospace is clearly performing better as a business, at least partly because it has had more time operating as a stand-alone company. Both have solid long-term growth prospects as people travel more globally, but for moderate and more conservative investors, larger and better-performing GE Aerospace will likely be the better choice right now.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends GE Aerospace and Honeywell Aerospace. The Motley Fool has a disclosure policy.
