Shares in Honeywell International (NYSE:HON) rose 32% in 2017 as the industrial conglomerate significantly outperformed peers such as United Technologies and General Electric Company (NYSE:GE). While the former still needs to convince the market it's on track with its long-term objectives -- not least with the production of its geared turbofan engine and completion of its Rockwell Collins acquisition -- and GE battles with a possible structural problem at its power segment, Honeywell has had a solid year of execution. I have three key points to note:
- Earnings per share (EPS) looks set to come in at the high end of original guidance for 2017, with stronger-than-expected sales growth more than offsetting weaker-than-expected operating margin.
- Management has executed well and is on track to significantly increase cash flow generation in the future.
- The market has rewarded industrial conglomerates when they restructure and focus on their core activities -- a good example coming from the Danaher/Fortive split -- and Honeywell's plan to spin off its homes and global distribution and transportation (turbochargers) businesses in 2018 is a welcome development.
All told, it was a good first year for Adamczyk.
Honeywell's execution -- in particular improving performance in its aerospace and performance materials and technologies segments -- and restructuring suggest it's well placed for 2018. In contrast to GE, Honeywell's spin-offs will take place after a period of earnings strength, and that means investors are likely to receive full value for the assets that management is selling for them.
Moreover, the spin-offs should enable Adamczyk to be more aggressive with acquisitions in order to improve Honeywell's growth rate -- something in line with his objectives.
Investors will be looking forward to another year of good execution, with the big intangible coming from potential acquisition activity as Adamczyk reshapes the company. Moreover, the U.S. industrial economy is set for stronger growth in 2018. This matters to Honeywell in particular because it's a company generating 60% of its earnings from hard-to-predict short-cycle businesses. In other words, it could be set for some positive earnings estimate revisions if growth is stronger than expected.