Goldman Sachs Group, Inc.: Honeywell Aerospace (HONA.US) Q3 results beat expectations, but turning around operations will still take time; maintain "Neutral" rating.

Goldman Sachs Group, Inc. released a research report maintaining a "Neutral" rating on Honeywell Aerospace Inc (HONA.US) with a target price of US$190. The bank noted that HONA's fiscal 2026 third-quarter revenue and adjusted EBIT both beat market consensus, and free cash flow also came in above expectations, but organic growth remained relatively slow, with supply chain constraints and company reinvestment pressuring margins. Goldman Sachs Group, Inc. believes the company's efforts to turn around operations could drive accelerating fundamentals in the future, but better incremental margins may still take several quarters to materialize. The earnings report showed that HONA's third-quarter revenue was US$4.644 billion, above market consensus of US$4.570 billion and above Goldman Sachs Group, Inc.'s prior forecast of US$4.555 billion; organic revenue grew 2% year over year. Adjusted EBIT was US$1.161 billion, above market consensus of US$1.060 billion and Goldman Sachs Group, Inc.'s forecast of US$1.128 billion. Free cash flow was US$500 million, above market consensus of US$413 million. However, Goldman Sachs Group, Inc. also noted that HONA's adjusted net profit for the quarter was US$703 million, slightly below its forecast of US$707.8 million; adjusted earnings per share were US$2.21, US$0.02 below Goldman Sachs Group, Inc.'s forecast of US$2.23. By segment, Electronic Solutions revenue was US$1.784 billion, up 4.4% year over year and US$74 million above Goldman Sachs Group, Inc.'s forecast; operating profit was US$564 million, a margin of 31.6%, up 170 basis points year over year and above Goldman Sachs Group, Inc.'s expected 28.8%. Engines & Power Systems revenue was US$1.515 billion, up 2.5% year over year and US$25 million above Goldman Sachs Group, Inc.'s forecast; however, operating profit was US$250 million, a margin of 16.5%, down 370 basis points year over year and below Goldman Sachs Group, Inc.'s expected 19.7%. Control Systems revenue was US$1.345 billion, down 0.1% year over year and US$10 million below Goldman Sachs Group, Inc.'s forecast; operating profit was US$382 million, a margin of 28.4%, up 50 basis points year over year. Overall adjusted segment operating margin was 25.0%, above Goldman Sachs Group, Inc.'s forecast of 24.8%, but down 40 basis points from 25.4% in the prior-year period. By end market, commercial original equipment (OE) revenue grew 7% year over year, with organic growth of 8%, mainly driven by higher commercial air transport build rates and increased optional equipment sales; commercial aftermarket revenue grew 2% year over year, with organic growth of 2%, mainly supported by underlying demand; defense and space revenue grew 1% year over year, with organic growth of 1%, with contributions from the CAES and Civitanavi acquisitions offset by lower international sales and the wind-down of a non-aviation restricted government program. Supply chain bottlenecks remain a key variable, with margins under near-term pressure Goldman Sachs Group, Inc. emphasized in the report that HONA is still working to resolve supply chain constraints. The company said conditions improved at some suppliers during the quarter and expects supplier output to continue ramping from the fourth quarter of 2026 through 2027, but output from constrained suppliers remains below the level HONA requires. Goldman Sachs Group, Inc. believes that current company revenue growth is relatively slow, while the company continues to reinvest in the business to address supply chain challenges, which puts some pressure on margins. These efforts may drive a gradual acceleration in fundamentals in the future, but better incremental margins may still take several quarters. Looking ahead, HONA updated part of its fiscal 2026 guidance: organic growth maintained at 4%-5%; simulated standalone adjusted EBIT of US$4.375 billion-US$4.425 billion, versus prior guidance of US$4.350 billion-US$4.450 billion and market consensus of US$4.350 billion; simulated standalone adjusted EPS of US$7.85-US$8.00, versus prior guidance of US$7.60-US$7.90 and market consensus of US$7.69; second-half 2026 free cash flow of US$1.2 billion-US$1.4 billion, versus prior guidance of US$1.0 billion-US$1.5 billion and market consensus of US$1.09 billion. The company said the midpoints of its full-year EBIT and free cash flow guidance ranges remain unchanged. Goldman Sachs Group, Inc. also adjusted its financial forecasts for HONA: 2026E revenue raised from US$18.249 billion to US$18.503 billion, 2027E slightly adjusted from US$19.436 billion to US$19.496 billion, and 2028E lowered from US$20.875 billion to US$20.807 billion; EBIT forecasts of US$3.544 billion, US$4.218 billion and US$4.710 billion, respectively; EPS forecasts of US$7.91, US$8.22 and US$9.52, respectively, with 2026E raised from the prior US$7.69 and 2027E and 2028E lowered from the prior US$8.54 and US$9.95. Based on the new forecasts, the corresponding price-to-earnings ratios for 2026-2028 are 19.5x, 18.8x and 16.2x, respectively; net debt/EBITDA are 2.8x, 2.3x and 1.7x, respectively.