What to Look for When Honeywell Reports Earnings

The pressure is on for Honeywell to deliver.

Lee Samaha
Lee Samaha
Apr 16, 2019 at 9:34PM
Industrials

While General Electric (NYSE:GE) and United Technologies (NYSE:UTX) have attracted most of the headlines so far in 2019, the third of the big three aviation-heavy industrial conglomerates, Honeywell International (NYSE:HON), has seen its stock quietly appreciate to a similar year-to-date performance as the other two -- up 20% and change.

What can investors expect from the upcoming results, due Thursday morning, and are they likely to propel the stock higher in 2019?

A screen showing stock price data.

Image source: Getty Images.

Honeywell's guidance

Let's start by summarizing the company's guidance for the first quarter and full year. Honeywell's full-year guidance is pretty much in line with United Technologies' forecast for organic sales growth of 3% to 5% and General Electric's guidance for low- to mid-single-digits organic industrial sales growth.

However, investors have reason to be optimistic. For example, on the fourth-quarter earnings call, Honeywell's CFO Gregory Lewis said the low end of full-year guidance reflected the possibility of "some economic slowing, but not a recession" and then went on to say that he expected Honeywell would be at the upper end of the guidance range for organic growth. 

Similarly, at an investment conference in March, Lewis said that despite some softness in the safety and productivity solutions (SPS) segment, the company was tracking toward the high end of organic revenue growth guidance for the first quarter.

In this context, it's fair to expect a good number for revenue growth in the first quarter, but the key point of debate will be the guidance for the rest of the year. 

Metric

First-Quarter Guidance

Full-Year 2019 Guidance

Organic sales growth

3%-5%

2%-5%

Segment margin

20.3%-20.6%

20.7%-21%

Adjusted EPS

$1.80-$1.85

$7.80-$8.10

Free cash flow

N/A

$5.4 billion-$6 billion

Data source: Honeywell company presentations.

Honeywell's margin improvement

The commentary around sales growth will obviously be the first thing to look at, but keep an eye on margin, too. In late 2018 Honeywell spun off two lower-margin businesses, turbocharger manufacturer Garrett Motion and home-products company Resideo Technologies, and this will help boost segment operating margin from 19.6% in 2018 to 20.7%-21% in 2019.

That's good news, but it could get better. There's reason to believe that the two largest segments, and also those with the highest margin, namely aerospace and performance materials and technologies (PMT), could have upside potential in 2019. Here's a look at the relative importance of each segment to the company. 

Honeywell Segment

2019 Organic Growth Guidance

2018 Sales 

2018 Segment Margin

Aerospace

Mid-single digits

$12.9 billion

22.6%

Honeywell building technologies (HBT)

Low single digits

$5.4 billion

17.3%

Performance materials and technologies (PMT)

Low single digits

$10.7 billion

21.8%

Safety and productivity solutions (SPS)

Mid-single digits

$6.3 billion

16.3%

Data source: Honeywell company presentations.

The trends within aerospace remain strong, and as you can see above, the full-year guidance for 2019 for mid-single-digit organic revenue growth looks conservative considering Honeywell aerospace exited 2018 with a 10% organic revenue growth rate. The key number to look out for in the coming results is aftermarket growth -- something General Electric and United Technologies investors will also be looking out for.

Honeywell aerospace organic revenue growth.

Data source: Company presentations. Chart by author.

PMT also could surprise on the upside because the price of oil has moved up from around $45 a barrel at the start of the year to around $61 a barrel as of this writing, and this could firm up the capital spending plans of Honeywell's process solutions customers as well as UOP's (Honeywell's catalyst and absorbents business whch is formerly known as Universal Oil Products)  petrochemical and refining clients -- something to look out for.

In addition, within SPS, Honeywell's warehouse automation solutions are likely to remain strong thanks to ongoing spending on e-fulfillment warehousing.

Areas of weakness?

That said, an industrial conglomerate is never going to be firing on all cylinders at the same time, and most forecasters have U.S. industrial production growth slowing in 2019 and 2020. Indeed, during the conference in March, Lewis noted some softness in Honeywell's short-cycle businesses in SPS -- likely to be industrial safety products. However, given that industrial safety is less than 6% of total sales, it's unlikely to move the needle too much.

On another note, Honeywell is a longtime supplier of electronic and mechanical systems on Boeing's 737 program, and the recent cut in production on the 737 MAX is likely to have an impact on the company -- look out for any management commentary in the matter.

Honeywell's prospects in 2019

Investors already know that first-quarter revenue should be good, so anything merely in the middle of the 3%-5% guidance range could be taken as a negative.

Turning back to valuation matters in order to summarize, the midpoint of earnings and free cash flow guidance puts Honeywell on a forward PE ratio of around 20.2 times earnings and a price-to-free-cash-flow multiple of 20.5 times.From a stock price perspective, the pressure is on to deliver earnings at the high end of expectations in order to make the stock a compelling buy.