When industrial giant Honeywell International (NYSE:HON) first laid out its full-year 2020 projections, it called for organic sales to grow as much as 3%. It reaffirmed that call in early March. And all of that could be set asunder because of COVID-19, the impact of which began to increase in scale in the days following Honeywell's March update. In the end, 2020 is likely to be a bad year for Honeywell.
But that doesn't change the long-term positives here.
It was going to be a decent year
Going into 2020, Honeywell optimistically called for organic sales to increase as much as 3%. That may not sound all that impressive, but in the cyclical industrial industry it's actually a pretty good number. These companies tend to see sales growth track along with the broader economy, both up and down. However, Honeywell provided a range, as most companies do, on this metric. The downside risk was flat organic growth. Even with that, it was expecting margin improvements to allow for at least a 5% bump in adjusted earnings in 2020.
But that guidance was offered up at the end of January, well before COVID-19 started to impact the broader global economy. Even as the coronavirus began to spread, Honeywell continued to back its outlook for 2020, still sticking to its full-year guidance in a March 10 industry conference. Shortly after that conference, however, countries around the world started to shut down in an effort to control the spread of COVID-19. Non-essential businesses were closed, and citizens were asked to stay home.
Early economic data suggest that there will be a deep downturn. Worse, there's unlikely to be a quick pickup afterwards, because the effort to reopen economies is expected to be a slow process. Again, the goal is to contain the spread of COVID-19. Reopening too fast could simply lead to a resurgence of the virus.
The upshot is that 2020 is likely to be worse than Honeywell was projecting at the start of the year. The low end of its guidance, flat organic growth, now looks like it could be a best-case scenario. It shouldn't be surprising that the stock remains over 25% below its early-year highs, even after a material market rebound.
Don't get too down
That said, Honeywell's dividend yield, at around 2.7%, is near the high end of its historical range, suggesting that the stock price might be relatively attractive today. Dividend-focused investors with a long-term view would do well to at least take a look at the company, noting that it has increased the dividend at an annualized rate of 10% over the past decade. As an industrial company, Honeywell's sales and earnings have always ebbed and flowed along with economic activity. So, yes, a COVID-19 downturn might hurt in the near term, but it certainly won't be a surprising or unusual thing to see the company's top and bottom line decline in a recession. In fact, the company is actually in pretty good shape to weather the hit.
Honeywell ended 2019 with roughly $10 billion worth of cash on its balance sheet. Its financial debt to equity ratio was roughly 0.15 times, which is low for any industry, let alone a cyclical one. And it covered its interest expenses by an incredibly strong 77 times. The company's long-term debt load has increased by 140% over the past decade, which isn't a great trend. But the low interest rate environment and the company's strong underlying business have allowed it to easily afford the associated costs. In fact, management recently highlighted that it has been focused on refinancing debt in an effort to lock in the historically low interest rates available in recent years.
On top of that of what is a very healthy balance sheet, Honeywell has also taken out some extra insurance. It just inked a $6 billion term loan that will provide the company with extra liquidity if it needs it. That remains to be seen, but it's nice to know the "insurance" is there just in case.
Longer-term, however, Honeywell has been shifting in a direction that should serve it -- and its shareholders -- well. It has increasingly been looking to digitize its business, with a focus on recurring revenue from things like software that helps to track and manage everything from factory floors to airline and building operations. Management believes that over the long-term it can grow this business at a 20% annualized clip. At the same time, it is using technology to help streamline its own business. That includes rationalizing supply chains and simplifying its go-to-market approach. It expects these efforts to save it a billion a year on the cost side, while reducing inventory needs by roughly the same amount.
These efforts aren't going to stop because of COVID-19. In fact, they might become even more important. That will remain true even as potentially dismal top- and bottom-line figures attract all of the attention. In short, investors need to look past the cyclical nature of Honeywell's business here and see what's under the covers -- a financially strong company that is increasingly well positioned to prosper in the years ahead. The coronavirus will be a headwind for sure, but Honeywell looks like it can handle it.
Time for a deep dive
It wouldn't be fair to describe Honeywell as incredibly cheap today, but it does appear to be reasonably priced. Its price to sales ratio and price to book value ratio, for example, are both at or below their five-year averages. For long-term investors, buying a well run company at a fair price is still a pretty good option.
There's no way to tell what will happen from here, so a COVID-19-driven recession could push Honeywell's stock lower. But if you focus on the core of the business, holding on through a rough patch won't be so hard. In fact, it might even give you an opportunity to buy more of the stock while you wait for the eventual economic recovery.