Honeywell's (HON 0.26%) fourth-quarter earnings report saw the company producing its customary earnings beat and the industrial conglomerate looks well placed for a strong recovery in the second half of 2021. In addition, the results of its various segments gave great color on what investors can expect from the industrial sector in 2021, and where to invest if you are looking for upside potential.
How Honeywell makes money
The industrial conglomerate operates out of four segments. First, the Aerospace segment sells into the commercial aerospace (original equipment and aftermarket) and defense markets. Second, Honeywell Building Technologies (HBT) sells building management systems, controls and solutions including fire and safety equipment.
Honeywell's building controls help buildings work better. Image source: Getty Images.
Third, Performance Materials and Technologies (PMT) sells process-automation solutions, advanced materials to a range of industries including automotive, and refining catalysts and absorbents (UOP business) to refining and petrochemical industries. Finally, the current star of the show, the Safety and Productivity Solutions (SPS) segment, sells warehouse automation solutions, Internet of Things (IoT) sensors and controls, and safety and workforce productivity solutions.
Data source: Honeywell presentations. Chart by author.
1. Warehouse automation
Two of the hot industries right now come from the SPS segment. Honeywell's Intelligrated (warehouse automation largely for e-commerce facilities) continues to grow at a rapid pace. In fact, Intelligrated's backlog was up 70% at the end of the fourth quarter. Clearly, spending on e-commerce facilities is going to be very strong again in 2021.
| Honeywell SPS Segment |
Fourth-Quarter Organic Growth |
|---|---|
|
Safety |
41% |
|
Productivity solutions and services |
9% |
|
Warehouse and workflow solutions |
36% |
|
Sensing and IoT |
(2%) |
|
Total |
27% |
Data source: Honeywell presentations.
Not only has e-commerce received a boost from the pandemic, but it also appears companies are prioritizing investment in automation. Indeed, Rockwell Automation's (ROK 0.35%) management recently spoke of increasing capacity in the face of a "sharp uptick in demand" for its intelligent devices and information solutions.
Digging into Rockwell's recent full-year guidance, it's clear that there is a bifurcation in near term prospects for process automation (continuous flow of fluid materials, and a Honeywell strength) and automation of manufacturing processes (encompassing discrete and hybrid automation). For example, Rockwell expects its discrete automation sales to be up 10% in 2021 with hybrid up "high single digits, while process automation sales are expected to be flat.
2. Productivity solutions
The second hot area is so-called productivity solutions (see table above). In a nutshell, these are data capture products such as mobile computers, handheld scanners, and printers. That's music to the ears of Honeywell's key competitor Zebra Technologies (ZBRA +11.46%). Zebra had a very strong year in 2020 and it looks like both Honeywell and Zebra are going to benefit again in 2021 from the secular trend toward investing in automation.
Image source: Getty Images.
It all points to another strong year for e-commerce facility and automation spending, so don't be surprised if Zebra beats earnings estimates when it reports on Feb 11.
3. Commercial aviation aftermarket
With a muted outlook for defense, it may come as a surprise that Honeywell has a positive outlook for commercial aerospace in 2021. Indeed, management expects a "gradual ramp in commercial aftermarket" growth in 2021. Then again, conditions could hardly be worse than they were in 2020 and the comparisons are about to get much easier from the second quarter onward.
In this context, investors should think of the aerospace sector as embarking on a multi-year recovery in 2021 rather than as beleaguered sector to avoid.
Data source: Honeywell presentations. Chart by author.
Indeed, taking this view leads investors to looking at a stock like Raytheon Technologies (RTX +0.16%) .The company's mix of solid defense revenues and opportunity to embark on a multi-year recovery in commercial aerospace make it an attractive investment option for investors. Throw in a compelling valuation and a 2.6% dividend yield and Raytheon is worth a look for 2021.
