Shares of Honeywell International (HON -0.19%) continue to surge as the industrial conglomerate approaches an all-time high. The rising stock price is great for shareholders, but a closer examination of Honeywell's third-quarter earnings report released late last week points out several weaknesses.

Let's analyze three key takeaways from the report to help investors decide if they should sell the stock, hold off buying it at its current price, or give the company the benefit of the doubt despite its mixed performance.

1. Aerospace remains weak, but other segments are showing improvement

Honeywell's third-quarter sales were down 14.2% year over year and earnings were down 25%. That's not great, but it's an improvement from the second quarter's 18% year-over-year revenue decline and 40% earnings decline.

Business Segment

Q3 2020 Sales

Change YOY

Q2 2020 Sales

Change YOY

Aerospace

$2.66 billion

(25%)

$2.54 billion

(27%)

Performance Materials & Technologies (PMT)

$2.25 billion

(16%)

$2.22 billion

(17%)

Safety & Productivity Solutions (SPS)

$1.58 billion

8%

$1.54 billion

1%

Building Technologies (BT)

$1.31 billion

(8%)

$1.12 billion

(17%)

Data source: Honeywell International. YOY = year over year.  

Aerospace, Honeywell's largest segment by revenue, continues to be its most troubled business line. Greg Lewis, Honeywell's CFO, noted on the earnings call:

"Global flight hours will remain far below pre-COVID levels, and we don't expect air transport flight hours to improve materially, impacting our air transport aftermarket sales. Our commercial original equipment business will continue to be impacted by lower air transport OEM build rates and lower business jet demand due to the economic slowdown."

The company cited that its air transport aftermarket business was down 55% and its business aviation aftermarket line was down 28%. Double-digit growth in defense and space wasn't enough to counteract the reality that planes are being built less, people are still flying less, and there's less aftermarket business.

Aside from aerospace and PMT, Honeywell's BT segment was only down single digits year over year. And its SPS segment continues to post better results than last year. Still, poor aerospace results are a significant cloud over the company's performance.

A parked airplane with a digital network superimposed over it.

Image source: Getty Images.

Reinstated guidance

In the first quarter, Honeywell suspended financial guidance due to economic uncertainty. With a better handle on the challenges of the pandemic, the company reinstated guidance, predicting fourth-quarter earnings per share (EPS) of $1.97 to $2.02 and full-year adjusted EPS of $7 to $7.05.

In January, Honeywell predicted full-year EPS of $8.60 to $9 after earning an adjusted $8.16 per share in 2019. Although the company's new guidance is lower than what it had originally estimated -- and lower than last year -- reissuing guidance is encouraging because it shows investors what they can anticipate from its business. It also holds Honeywell accountable for the expectations it sets. It's worth noting that Honeywell's fourth-quarter EPS guidance is close to the adjusted $2.06 it earned in the fourth quarter of 2019. After a rough second quarter, Honeywell is bridging the gap between its 2019 results and its 2020 results, a sign that its business is improving and adjusting well to the pandemic.

 

Q4 2020 (Expected)

Q3 2020

Q2 2020

Q1 2020

Q4 2019

Q3 2019

Q2 2019

Q1 2019

Revenue

$8.2 billion to $8.5 billion

$7.80 billion

$7.48 billion

$8.46 billion

$9.50 billion

$9.09 billion

$9.24 billion

$8.88 billion

EPS

$1.97 to $2.02

$1.56

$1.26

$2.21

$2.06

$2.08

$2.10

$1.92

Adjusted FCF

 No guidance 

$758 million

$1.3 billion

$800 million

$2.29 billion

$1.29 billion

$1.5 billion

$1.2 billion

 Data source: Honeywell International.  

In the fourth quarter, the company expects positive growth in all four of its business segments, paving the way for higher profit margins, more share repurchases, and potentially more mergers and acquisitions in 2021. Honeywell's upbeat guidance, more so than its results, could be the reason its stock continues to trade higher.

Optimistic 2021 growth drivers

In addition to its financial outlook, Honeywell presented assumptions and predictions for 2021 that the company hopes will allow it to return to growth and margin expansion after it gains its footing at the end of 2020.

Macro planning assumes...

...then the 2021 verticals outlook suggests:

Infection rates are manageable

Commercial flight hours improve modestly in the first half and accelerate slightly in the second half.

Economy stays stable

Defense budget spending remains stable.

Sequential economic improvement throughout the year

Oil prices rise moderately in the second half.

Effective vaccine becomes available early 2021

Non-residential construction remains stable.

Fiscal stimulus supportive of economy

Warehouse automation and personal protective equipment segments strengthen.

Data Source: Honeywell International  

Expectations for a stable economy, an effective vaccine in early 2021, more government aid and stimulus, higher oil prices, and an acceleration of commercial flying in the second half of the year are all encouraging predictions. Optimism is appreciated, but investors should be mindful that these assumptions and hopes are likely to drive the company's guidance. And if an economic recovery takes longer than expected, a vaccine is delayed, or any number of factors aren't what the company expects, it could potentially lead to disappointing earnings.

Expensive, but still a long-term buy

Honeywell's third-quarter earnings were better than the second quarter, but problems persist. A struggling aerospace segment continues to weigh down the company's performance. Reinstated guidance and optimistic predictions for 2021 are helpful, but Honeywell needs to prove it can return to growing its top and bottom line, along with FCF. Trading near an all-time high, this industrial stock may have gotten a little ahead of itself, but there are several reasons why Honeywell is still a solid long-term buy.