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Honeywell Stock Soars in Powerful Earnings

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In stark contrast to industrial and aerospace rivals General Electric (NYSE: GE  ) and Textron (NYSE: TXT  ) , both of which disappointed investors pretty badly last week, Honeywell (NYSE: HON  ) ... didn't.

To the contrary, with Honeywell stock up 3.8% in response to earnings, it appears investors were actually pretty pleased with the numbers Honeywell put up. But should they be?

On one hand, the numbers themselves certainly argue in the affirmative. Last quarter, Honeywell produced a 16% improvement in per-share earnings (to $1.21) on essentially flat sales (up just 0.2% to $9.3 billion). Operating margins increased 120 basis points, and going forward, Honeywell promised to deliver full-year pro forma profits of at least $4.80 -- that's a nickel higher than their earlier prediction -- and perhaps as much as $4.95 per share.

On the other hand, though, General Electric produced nearly as much in profits growth as Honeywell did, and on about the same growth in revenues -- i.e., zilch growth in revenues. But if that's the case, then what was it about GE's numbers that disappointed investors so mightily, and how did Honeywell stock avoid GE's fate?

The answer is "free cash flow." Honeywell had it. General Electric (almost) didn't.

Whereas GE on Friday had to own up to a 90% plunge in cash from operations, Honeywell could crow over a 74% increase. Even after making sizable investments in capital spending, this left Honeywell with 9% better cash profits -- free cash flow -- than it had generated a year ago. GE, on the other hand, appears likely to have burned cash. (GE didn't give detailed cash-flow information in its earnings release, and it hasn't filed its 10-Q with the SEC yet, so we can't be sure.)

To my Foolish eye, that's the key differentiator between the quarter Honeywell turned in, and the disaster that was GE. And why did it happen?

GE explained its near-lack of cash production by the need to stock up on inventory to fulfill orders received in Q1 that won't be delivered until later in the year. In contrast, Honeywell CEO Dave Cote described how his company "balanced [its] portfolio of both short- and long-cycle businesses" in a manner that "continues to drive our outperformance." 

That was true for Honeywell's cash machine last quarter. And it was true for Honeywell's stock performance last week.

For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.

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