Honeywell Aerospace, Just Spun Off, Posted High Q2 FCF Margins; Value Investors Love HONA Stock

Honeywell Int'l split into two companies at the end of June: Honeywell Technologies (HON) and Honeywell Aerospace (HONA). Q2 results (for the combined company through June 29) show that Honeywell Aerospace (HONA), a defense technology company, had much higher FCF margins. Its valuation also looks better for value investors.

Moreover, HONA short-put yields are much more attractive, with higher premiums at similar delta ratios than at HON. This article will show how to play short-put HONA yields.

HONA closed at $210.83 on Monday, July 27, down about $10 from where it was about a month after its first day of spinoff trading debut on June 29, when it closed at $220.19.

Last week, it hit a trough price of $195.87 on July 23, following the combined company's Q2 earnings release earlier that morning (under the banner of “Technologies”). Since then, HONA stock has moved higher as the market has better digested the results. 

Earnings and Free Cash Flow Distillation

This might be because Honeywell Technologies (fka Honeywell International) did not specifically announce the Q2 pro forma results for Aerospace (HONA) as it did for Technologies (HON) in the July 23 release.

However, using simple arithmetic, it's apparent that Honeywell Aerospace had much higher Q2 free cash flow (FCF) performance. Moreover, this is likely to continue.

For example, the company reported that the combined company had total Q2 revenue of $9.719 billion, of which $5.187 billion was from Technologies (HON). That implies that Aerospace (HONA) revenue was $4.532 billion (slightly lower than at HON).

Total free cash flow (FCF) was $1.252 billion, but the Technologies (HON) portion was $456 million. That implies that Aerospace was much higher at almost $800 million ($1,252m - $456m = $796m FCF). 

Moreover, HONA's FCF margin was much higher:

   $796m / $4,532m sales = 17.56% FCF margin at Aerospace (HONA)

   $456m / $5,187m sales = 8.79% FCF margin at Technologies (HON)

In addition, the 10-Q filing, released the next day (July 24), showed that Aerospace revenue rose +5.2% in Q2 from $4.307 billion to $4.532 billion a year earlier. That compares to HON's +3.638% rise, as disclosed in the earnings release the day earlier.

HONA FCF Forecasts

Management has also guided that Aerospace will generate between $1.0 billion and $1.5 billion in FCF during the second half of 2026 (on page 113 of its June 3 Investor Day Aerospace presentation deck).

It also said Aerospace had generated $2.5 billion in pro forma FCF during 2025 (page 120) on $17.716 billion in 2025 adj. net sales (page 128). That works out to a 14.1% FCF margin.

If HONA generates $1.25 billion in FCF during H2, along with its $796 million in Q2, it will have made $2.046 billion. Using an estimate 600 million in FCF for Q1, the est. 2026 total will be $2.646 billion, or 5.84% higher than in 2025.

Moreover, analysts project $19.05 billion in sales this year, so the FCF margin will be 13.9%, close to the 14.1% in 2025. If it makes 14% on 2027 revenue forecasts of $20.59 billion, FCF could rise to $2.88 billion.

In fact, FCF should keep rising based on Aerospace's strong order backlog and its financial discipline and projections in the Investor Day presentation. For example, Aerospace management projected $4.0 billion in FCF by 2020 (see pages 115 and 120). 

This could push its valuation much higher.

Price Targets for HONA

Using a 23 times FCF multiple and our projected $2.88 billion in FCF for 2027, Honeywell Aerospace (HONA) has a fair value of $66.24 billion. That is close to its market cap today of $66.8 billion, according to Yahoo! Finance.

However, if the company generates over $3.0 billion in the next two years, its valuation could soar to $75 billion using a 25x multiple. That 13.6% higher than today's price.

In other words, the price target should be around $239.50 per share (i.e., $210.83 x 1.136).

Why did I use these multiples? Lockheed Martin (LMT) has an 18.4x FCF multiple (i.e., a 5.3% FCF yield), with a lower FCF margin. For example, in Q2, its TTM FCF was $8.729 billion on $77 billion in TTM sales, from Stock Analysis data. That was a 11.3% FCF margin, much lower than Honeywell Aerospace's 14% implied Q2 TTM margin.

As a result, HONA deserves at least a 24% to 25% higher FCF multiple (i.e., 23-25x).

Wall Street analysts agree. Yahoo! Finance projects a PT of $260.50 from 15 analysts, and Barchart's mean survey PT is $255.38.

The bottom line is that HONA stock could be undervalued here. However, a more interesting play is to short out-of-the-money puts. This is because they have high premiums.

Shorting HONA Puts

For example, the Aug. 21 expiration period shows that three-week expiry puts at the $195.00 strike price, about 7.5% lower than Monday's closing price, have a midpoint premium of $5.50.

That means an investor can earn $550 immediately after posting $19,500 with their brokerage firm and entering an order to “Sell to Open” 1 put at $195.00 expiring Aug. 21. 

That works out to a 3-week expected yield of 2.82% (i.e., $550/$19,500).

In addition, if this can be repeated each month for six months, the expected return (ER) is 16.92%. That's potentially more than just holding HONA stock (i.e., an ER of 13.6% as shown above).

Moreover, even if HONA drops to $195.00, the breakeven point is lower at $189.50, since the short-put premium is already in the account. That is 10.1% below yesterday's close of $210.83. And the potential upside is +26.4% (i.e., $239.50 / $189.50 -1).

(Side note. HON puts expiring Aug. 21 have a lower 1.59% yield for a strike price - i.e., $3.70/$232.50 strike - with a similar delta ratio).

The bottom line is that value investors love this HONA short-put play over the next 3 weeks.