Honeywell's Earnings Set the Tone for the Reporting Season

Good news all around for the industrial conglomerate's earnings. It reads across well for GE, Emerson Electric, and United Technologies, too.

Lee Samaha
Lee Samaha
Apr 23, 2019 at 8:50AM
Industrials

Going into its first-quarter earnings report, Honeywell International (NYSE:HON) was under a bit of pressure to deliver. After all, in March, CFO Greg Lewis had told investors that first-quarter organic sales growth was tracking toward the high end of the guidance range of 3%-5%, so the bar was already set high. No matter, the number came in at 8% and Lewis' forecast was clearly an understatement. 

Honeywell's first-quarter beat most expectations on nearly all metrics, and there were plenty of good takeaways for other industrial companies, so let's take a closer look at them.

Honeywell raises guidance

In a year where U.S. industrial production growth is expected to slow to 2.6% from 3.9% in 2018, and some risk around growth in China and Europe -- at least according to Honeywell's process automation rival Emerson Electric -- it would be understandable if there were some fears around what Honeywell would report.

A man holding up a smartphone with the word and icon for Wi-Fi on the screen while inside an airplane.

Honeywell is gaining traction with its connected aircraft solutions such as in-flight Wi-Fi. Image source: Getty Images.

However, as you can see below, the first-quarter numbers came in better than management's forecast a few months ago, and full-year guidance was increased.

Also, it's hard not to think that Honeywell's management is being conservative because organic growth was 8% in the first quarter and the guidance for the second quarter is 4%-7%, yet full-year guidance is for only 3%-6%. In addition, there are signs of strength in all four of Honeywell's segments -- a rare occurrence among industrial conglomerates.

Metric

Q1 Actual

Q1 Guidance

Current Full-Year Guidance

Previous Full-Year 2019 Guidance

Organic sales growth

8%

3%-5%

3%-6%

2%-5%

Segment margin

20.40%

20.3%-20.6%

20.7%-21%

20.7%-21%

Adjusted earnings per share

$1.92

$1.80-$1.85

$7.90-$8.15

$7.80-$8.10

Free cash flow

$1.16 billion

N/A

$5.5 billion-$6 billion

$5.4 billion-$6 billion

Data source: Honeywell International presentations. Numbers in bold represent where guidance was raised or results beat guidance.

What Honeywell's results mean for the industrial sector

In aerospace, as the chart below shows, the segment continues to grow at a double-digit pace and investors should note the pickup in aftermarket sales growth -- a very good sign for the upcoming earnings from aviation-heavy industrials United Technologies (NYSE:UTX) and General Electric (NYSE:GE).

On the earnings call, CEO Darius Adamczyk lauded the company's efforts in expanding its aftermarket sales team and developing sales of its connected aircraft solutions -- such as inflight Wi-Fi, smart takeoff and landing solutions, and other avionics solutions.

Honeywell's aerospace growth.

Data source: Honeywell International. Chart by author.

Energy-related capital spending

There was also some good news from the performance, materials, and technologies (PMT) segment, with organic sales growth of 5%. Within PMT, Honeywell Process Solutions (HPS) organic sales rose 7%, and even though UOP (formerly known as Universal Oil Products) organic sales only increased 1%, orders and backlog grew 6% and 8%, respectively -- a very good sign for future growth.

Adamczyk also discussed the positive impact of the price of oil being back above $60, saying, "whenever you get to this kind of an oil price, we feel very confident in the outlook for PMT." This is good news for HPS' rival Emerson Electric and Adamczyk's commentary regarding "a greater level of discipline" about capital spending in process automation is in line with the view of Emerson Electric CEO David Farr that the industry is set for a slow but sustained recovery.

Honeywell's first-quarter revenue

Data source: Honeywell International presentations. Chart by author.

Safety and productivity solutions and Honeywell building technologies

The safety and productivity solutions (SPS) segment also had an excellent quarter, with organic sales up 10%, but it was a mixed story with 15% organic sales growth in productivity solutions much more than offsetting a flat performance from safety.

Within productivity solutions, Honeywell's warehouse automation business (Intelligrated) generated growth in "really strong double digits," according to Adamczyk and this, combined with weak sales in safety products, led to a decline in segment margin (13.4% compared to 16% in the same quarter in 2018) and segment profit ($212 million compared to $231 million). 

However, Adamczyk believes Intelligrated will turn into "a higher margin business once we establish an install base" and he let the cat out of the bag on guidance in response to a question from Deutsche Bank analyst Nicole DeBlase: "[W]e're going to continue to see a rate of growth in SPS, which is, I think, mid-to-upper single digits for the year" -- https://www.fool.com/earnings/call-transcripts/2019/04/18/honeywell-international-inc-hon-q1-2019-earnings-c.aspx guidance given on the fourth-quarter earnings call called for a mid-single-digit increase.

Last, but definitely not least, the Honeywell building technologies segment (HBT) reported a super quarter of 9% organic sales growth. Adamczyk admitted that the separation of home products company from Resideo (NYSE:REZI) may have distracted the HBT team in 2018 (organic sales grew just 3% in 2018), but the first full quarter without Resideo has resulted in a strong performance and, hopefully, it can continue.

What it all means to investors

The results are obviously good news for Honeywell investors, and for the industrial sector at large, the demonstration of ongoing strength in aviation and energy capital spending bodes well for companies with heavy exposure like GE, United Technologies, and Emerson Electric. All told, a good start to the reporting season for the industrial sector.