But Honeywell is handling its challenges better than you might think, even boosting its earnings expectations for the year because of surprisingly strong margins. The recent earnings conference call gave investors an important peak inside of a company's operations and how Honeywell was able to grow its bottom line, despite headwinds. Here are the five biggest takeaways for investors from Honeywell's conference call.
Macro challenges remain
The macro environment in the first quarter wasn't easy, with headwinds from extreme weather, port shutdowns, decline in oil and gas investments and a strengthening U.S. dollar. -- David Cote, CEO
The first quarter wasn't terribly strong for any company on a macro basis, and Honeywell was no different. What's impressive was the double-digit earnings growth given this weak backdrop. Below, I'll get into some of the impressive numbers that show Honeywell handling the macro environment better than you might have expected.
That foreign currency translation is going to sting
Sales in the quarter of $9.2 billion, while up to 2% on a core organic basis were down 5% reported. -- David Cote, CEO
How bad is the strong dollar for U.S. companies right now? This quote should paint a pretty vivid picture.
When the dollar gets stronger, it makes foreign sales look smaller, even if sales prices and profits are the same in a foreign country's local currency. That's taken a toll on Honeywell's revenue, but it also makes profit expansion impressive (I'll get to that below).
The Middle East is still investing in oil
We're experiencing delays and reductions in countries that are net oil producers, like Russia, as refining and petrochemical project decisions are deferred. A notable exception is the Middle East, where we -- we've seen new wins and an active pipeline of new bids, particularly in the UAE and Saudi Arabia. -- Tom Szlosek, CFO
From an overall energy investment perspective, I thought this quote was very informative. In the U.S., we're hearing about the decline of oil drilling and the cutback in spending from big oil companies, but that's not the case worldwide. In the Middle East, there's a lot of investment, and there doesn't seem to be any discernible slowdown.
That's partly because OPEC sets a production target rather than being driven by market forces, but it means companies like Honeywell won't have the same negative impact as some others in energy.
Margin expansion is driving profit growth
Segment margins are expected to be up approximately 130 to 150 basis points versus 2014. We expect our segment margin rate to again benefit from the factors that drove the significant first-quarter margin expansion, especially operational excellence and execution. -- Tom Szlosek, CFO
Honeywell isn't growing much on the top line, but bottom line performance has been outstanding. Increased margins due to a company wide focus on operations have improved dramatically and are driving double-digit earnings-per-share growth.
There's only so much companies as large as Honeywell can squeeze out of operations, but if management can take some of the increased profits from existing operations and invest it in new products, this could create a new growth cycle long term.
Confidence in 2015 is increasing
As a result of that strong first-quarter performance and our confidence in the remainder of the year, we are raising the low end of our full-year guidance by a nickel to a new range of $6 to $6.15, or up 8% to 11% versus the prior year. -- David Cote, CEO
The negative macro economic environment, a strong dollar, and low oil prices don't seem to be having much of a negative impact on Honeywell this year, which is a sign that the company is stronger than it's been in a long time.
With shares trading at 17 times the high end of earnings expectations, and investors getting a 2% dividend yield from the stock, I think Honeywell's operational performance makes this an attractive stock. It won't ever be a high-growth business, but it provides products and services the industry needs to survive, and it's growing profitability, which is the kind of stability I want in a market that may be due for a correction at any moment.
