What happened?

Honeywell International Inc. (NYSE:HON) was the latest industrial giant to give its 2017 outlook. Whereas General Electric Company (NYSE:GE) delivered a relatively positive outlook, with CEO Jeff Immelt sounding an optimistic note on the U.S. economy, Honeywell International's outlook was a bit weaker -- somewhat like peer and onetime merger candidate United Technologies Corporation's (NYSE:RTX) outlook.

While General Electric Company is set to grow organic revenue by 3% to 5% in 2017, United Technologies (organic sales growth forecast for 2% to 4% in 2017) and Honeywell International (1% to 3%) are both facing near-term headwinds. Here are the key takeaways from Honeywell International's outlook. Starting with the remainder of the year:

  • Full-year 2016 EPS of $6.60 at the low end of the $6.60-to-$6.64 range given in the third-quarter earnings presentation.
  • Full-year 2016 sales, segment margin, and free-cash flow guidance left unchanged.

Now the 2017 guidance:

  • Organic sales growth in the range of 1% to 3%.
  • Segment margin of 18.8% to 19.2%, implying an expansion from 2016's segment margin of 18.1%, which is ahead of previously implied guidance for 18.55% to 18.85%,
  • Full-year EPS guidance range of $6.85 to $7.10, which straddles the analyst consensus for $7.08 and implies growth of 6% to 10% -- just about hitting the "targeting double-digits" growth guidance given in the third-quarter presentation.
  • Free cash flow in the range of $4.6 billion to $4.7 billion, implying growth of 8% to 11%.

It's always slightly disappointing to see weak looking EPS guidance, but the segment margin outlook is good, and the free cash flow guidance is a confirmation that the company's free cash flow conversion will increase notably in the future as the company moves out of a heavy investment phase.

Does it matter?

It's a slight weakening of an investment thesis that otherwise remains compelling. Even after the reduction in full-year 2016 estimates made on the third-quarter earnings presentation, Honeywell International is still an attractive stock. The share price recovered quickly through November: 

HON Chart

HON data by YCharts

Moreover, the value proposition -- based on underlying free cash flow generation -- is good. On the outlook presentation, management suggested that capital expenditures would take a mild step down in 2017 to around $1 billion and then a broader step down to the $800 million range, as the company moves out of its heavy investment phase.

Given the forecast for free cash flow of around $4.65 billion, ongoing growth in earnings, and the reduction in capital expenditures, it's not hard to see free cash flow hitting $5 billion to $5.2 billion in 2018.

That could see Honeywell trading on an enterprise value (market cap plus net debt)-to-free cash flow multiple of 18.8, and that's not bad for a company growing earnings in double digits. If you can ignore the near-term headwinds, then Honeywell is a good value.