Honeywell International (HON +0.06%) has acquired a reputation for giving conservative-looking guidance and then promptly beating it, and CEO Darius Adamczyk appears to be continuing that tradition with his outlook for 2020. There are plenty of moving parts to the industrial conglomerate's earnings and a lot of uncertainty around its end markets in 2020 -- not least from the production slowdown on the Boeing (BA +1.65%) 737 MAX -- but Honeywell still looks well placed for growth in the second half and beyond. Here's why.
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Honeywell International guidance
In order to understand Honeywell's earnings trajectory, here's a look at segment profit in 2019.
Data source: Honeywell International presentations.
Now let's take a look at the company's headline guidance for 2020. As you can see below, sales growth is expected to slow with earnings per share (EPS) rising in the range of 5.4% to 10.3%.
|
Honeywell Guidance |
Full Year 2020 |
Full Year 2019 |
|---|---|---|
|
Organic sales growth |
0%-3% |
5% |
|
EPS |
$8.60-$9 |
$8.16 |
|
Free cash flow |
$5.7 billion to $6.2 billion |
$6.3 billion |
Data source: Honeywell International.
Three reasons why Honeywell will exit the year in better shape
While the guidance for 0%-3% organic sales growth looks disappointing, there's reason for optimism that Honeywell's earnings growth will improve in the second half.
First, for the first quarter, management guided toward organic sales to be in the range of a decline of 2% to an increase of 2%. However, it should be noted that the 8% organic growth reported in the first quarter of 2019 was the highest quarter of growth for the company in the year. In other words, Honeywell is about to come up against its toughest comparable of the year.
However, organic growth was just 3% and 2% in the last two quarters of 2019, meaning comparisons will get easier in the back half of the year. Moreover, many industrial companies are expecting a better second half in general, and this could feed through into an improved spending environment overall.
The Boeing 737 MAX should return to service
Second, the outlook in the first half is being negatively affected by the ongoing grounding of the Boeing 737 MAX. Here's a look at Honeywell's organic sales growth guidance by segment.
|
Honeywell Guidance |
Full-Year 2020 Organic Sales Growth Outlook |
|---|---|
|
Aerospace |
Low-single digits to mid-single digits |
|
Honeywell building technologies (HBT) |
Decline in low-single digits to an increase in low-single digits |
|
Performance materials and technologies (PMT) |
Flat to low-single digits |
|
Safety and productivity solutions (SPS) |
Flat to low-single digits |
According to CFO Greg Lewis on the earnings call, the production delays on the 737 MAX are going to create "probably a low-to-mid single digit headwind to the Aerospace growth because of the production schedule changes."
However, since Boeing expects a return to service for the 737 MAX at around the midpoint of the year, it's fair to assume that Honeywell's aerospace growth could improve markedly in the second half. Moreover, a full year of 737 MAX production in 2021 should lead to an improvement in aerospace revenue when compared with 2020.
Many of Honeywell's businesses are in good shape
Third, management's commentary around its other businesses also suggests an improvement. I've already discussed aerospace above, and the SPS segment is also expected to see an improvement in the second half. For example, productivity products (around 22% of SPS sales) is expected to return to growth in 2020 after three consecutive declines to the end of 2019. Meanwhile, Honeywell's warehouse automation business, Intelligrated (27% of SPS sales), saw orders improve by 100% in the quarter, which will position the business well for 2020 as these major projects begin to drive growth starting in the second quarter and beyond.
Turning to PMT, Adamczyk said Honeywell process solutions (around 35% of PMT sales) had "a terrific quarter, double-digit orders growth," and Honeywell UOP (catalysts for refining, 27% of PMT sales) also had robust order growth -- suggesting good revenue growth down the line. The great imponderable in 2020 is likely to be growth at HBT, a business largely tied to non-residential construction.
Data source: Honeywell presentations.
Looking ahead
Don't be surprised if Honeywell's guidance proves to be conservative once again, and there's good reason to believe that the company will exit 2020 looking better than it does entering it.
In common with many other industrial companies in 2020, Honeywell's near-term outlook is somewhat dependent on a timely return to service for the Boeing 737 MAX. If that occurs alongside a return to growth in the SPS segment, and conversion of orders into revenue at PMT, then Honeywell could be set for a strong finish to 2020.
