Honeywell's Aerospace Momentum Confirmed but Supply Chain and Separation Risks Linger

What happened

Honeywell's aerospace segment accelerated in Q3 2025, driven by surging commercial aftermarket demand and steady defense orders, as highlighted in recent news. This performance prompted management to raise FY2025 guidance, with sales projected at $40.7–$40.9 billion and adjusted EPS of $10.60–$10.70, reflecting strong order growth of 22% year-over-year. The record $39.1 billion backlog provides multi-year revenue visibility, supported by aerospace cycle tailwinds and growing software-related recurring income. However, supply chain constraints in avionics and mechanical components continue to gate full backlog conversion, limiting margin expansion and organic growth potential. Moreover, execution risks around the planned Solstice spin-off and a three-way company split by 2H 2026 add uncertainty, tempering the positive momentum.

Implication

The aerospace strength bolsters near-term revenue and cash flow prospects, with free cash flow guidance of $5.2–$5.6 billion for FY2025 offering some downside protection if met. Persistent supply chain bottlenecks, however, could delay backlog conversion, leading to missed growth targets and margin pressures that erode valuation. Successful execution of the separations, starting with the Solstice spin-off in October 2025, may unlock value by focusing businesses on key megatrends, but any delays or cost overruns could heighten execution risks and investor skepticism. Elevated valuation metrics, such as a P/E of approximately 22.6, limit near-term upside unless Honeywell demonstrates improved backlog drawdowns and stable leverage ratios. Overall, while the aerospace cycle is favorable, the stock's performance hinges on overcoming operational hurdles and managing restructuring complexities without disrupting core operations.

Thesis delta

The recent news reinforces the aerospace-driven growth narrative in the master report, affirming the positive order and backlog trends. However, it does not alter the core HOLD thesis, as supply chain constraints and separation execution risks remain unchanged and critical to monitor. Thus, no material shift in investment outlook is warranted at this time.