Just weeks after its spin-off listing, Honeywell Aerospace (HONA.US) released its first earnings report, which fell short of expectations across the board, leading to a drastic 14% cut in target price by Societe Generale.

Due to Honeywell Aerospace's (HONA.US) first financial report since its independent listing falling short of expectations, BNP Paribas (BNP) has lowered its target price and warned that the stock is currently in a "cold palace," suggesting that the company may need a longer time to regain investor confidence. BNP analyst Matthew Akers maintained a "neutral" rating on Honeywell Aerospace on Thursday, while reducing the target price by 14% from $245 to $210. This adjustment stems from the company's second-quarter performance being below expectations and a significant downgrade of its full-year guidance. Following the earnings report release, Honeywell Aerospace's stock fell over 23% on Thursday. Akers noted that the current valuation is approaching the lower end of the aerospace sector range. In the report, Akers wrote, "Just weeks after the spin-off, the company downgraded its performance guidance, which has cast the stock into the 'cold palace'." He added that he would not adopt an optimistic outlook until clearer signs indicate that operational issues are improving. Supply chain bottlenecks inhibit growth Honeywell Aerospace completed its spin-off from Honeywell International Inc. (HON.US) in June of this year. The company attributed the underperformance of several business segments to supplier shortages. Specifically, organic revenue growth in the aftermarket was 8%, while original equipment sales grew by 6% and defense business revenue increased by 3%, all of which fell short of BNP's expectations. Declines in production and inventory write-downs negatively impacted profit performance, with adjusted EBIT at $1.02 billion, below Akers' previous estimate of $1.18 billion. The company also lowered its full-year outlook, projecting an organic growth rate down from 7%-9% to 4%-5%; the adjusted EBIT guidance was reduced to $4.35 billion to $4.45 billion, approximately $300 million lower than previous expectations. Product mix drags down profit margins Akers stated that management attributed the weakening profitability to an unfavorable business structureprioritizing original equipment deliveries over the higher-margin aftermarket business; and focusing on domestic defense projects at the expense of more lucrative international orders. BNP pointed out that the revised guidance indicates that Honeywell Aerospace's aftermarket growth in the second half of the year will be roughly flat or slightly positive, far below the high single-digit or even higher growth rates commonly achieved by peers. Management expects that, due to base effects, third-quarter performance will be roughly flat compared to the same period last year; however, they anticipate a stronger performance in the fourth quarter that would bring annual results closer to the revised target. Executives also indicated that they expect operational performance to improve by 2027. In the commercial market, the company expects that large commercial aircraft will remain the primary driver of growth, while demand for business aviation will remain stable. Management also noted that the political tensions in the Middle East and GEO Group Inc. have not yet had a substantial impact on demand. Waiting for clearer signs of recovery Despite the stock price decline post-earnings report making Honeywell Aerospace's valuation more attractive, Akers believes that investors are likely to remain cautious until supply chain issues are alleviated and aftermarket growth accelerates. BNP has revised its financial forecasts to reflect the weak quarterly performance and the downgraded full-year outlook, and believes that the stock price may still remain under pressure until the company demonstrates more robust operational execution.