After a very difficult 2020, industrial conglomerate Honeywell International (HON 1.77%) is setting up for a good recovery in 2021. CEO Darius Adamczyk presented at the J.P. Morgan Industrials Conference recently and what he had to say may well lead investors to believe the company is set to beat expectations in 2021. So let's take a look at what was said and why the company is well set for the year.
Honeywell's guidance
As ever with a business as diversified as Honeywell, it's a good idea to break out its earnings by segment. The full-year guidance in the table below was given on the fourth-quarter earnings call in January. It's the basis of why management is aiming for full-year sales of $33.4 billion to $34.4 billion (implying 1%-4% organic revenue growth). Full-year earnings per share (EPS) is expected to be in the $7.60-$8 range (implying adjusted growth of 7%-13%).
Business jet aviation is coming back strongly in 2021. Image source: Getty Images.
Adamczyk didn't back off the headline guidance during the presentation, but a combination of what he said and end-market conditions give cause for investor optimism.
|
Honeywell International Segment |
2021 Organic Revenue Growth Outlook |
2020 Segment Profit |
2019 Segment Profit |
|---|---|---|---|
|
Aerospace |
Flat to low-single-digit |
$2,904 million |
$3,607 million |
|
Honeywell Building Technologies (HBT) |
Low-single-digit |
$1,099 million |
$1,165 million |
|
Performance Materials and Technologies (PMT) |
Plus or minus low-single-digit |
$1,851 million |
$2,433 million |
|
Safety and Productivity Solutions (SPS) |
Double-digit |
$907 million |
$790 million |
Data source: Honeywell presentations.
Aerospace
Honeywell's aerospace segment's profit decline of 19% in 2020 wasn't quite as bad as its peers' commercial aviation-focused businesses. For example, General Electric's aviation segment profit fell a whopping 82% in 2020.
Some of the reasons for Honeywell's outperformance come from the fact that defense revenue tends to make up more than a third of its aerospace segment revenue. Also, business and general aviation make up around a third of its commercial aviation sales. Fortunately, the business jet market has held up a lot better than commercial passenger flights, and defense markets have remained strong through the pandemic.
In fact, recent air traffic data shows that business jet flights are now growing compared to 2020 and 2019. That's good news bearing in mind that Honeywell's Global Business Aviation outlook (released in autumn) called for a return to 2019 levels by the summer of 2021.
Indeed, in the recent presentation, Adamczyk said that the business aviation market was only down "a little bit" for Honeywell in the first quarter. Also, he declared himself optimistic that U.S. domestic flights could bounce back quicker than previously expected. It all points to an improving environment for the segment.
Honeywell's solutions help keep buildings healthy and energy efficient. Image source: Getty Images.
Honeywell Building Technologies
The segment contains a mix of building control solutions (around 45% of revenue) and fire and security products (40%), with building management systems making up the rest.
There's a bear and bull debate around the segment in 2021. The negative view relates to concerns about the state of the commercial buildings market in light of ongoing stay-at-home measures. The more positive side sees Honeywell's connected building solutions and how they use technology to create healthier, cleaner buildings while also generating energy savings.
With that in mind, Adamczyk was asked about HBT's prospects in 2021 and he said he expected a strong year with growth accelerating in 2022 and 2023. That should give investors some confidence in management's full-year outlook, particularly as it comes at a time when Honeywell is about to complete its first quarter.
Performance Materials and Technologies
The PMT segment is made up of process solutions (processing of liquids and raw materials, around 47% of revenue), UOP (absorbents and catalysts to refiners, around 27% of segment revenue), and advanced materials (around 26%).
Advanced materials is set to bounce back in line with increased industrial production, notably with automotive production. However, the energy-heavy process solutions and UOP businesses continue to see customers holding back on spending given the current weakness in demand.
Image source: Getty Images.
The good news is, the recent rise in the price of oil and a recovering economy are surely going to have a positive impact on demand in the future. And while a potential pickup in sales might not be seen in 2021, process solutions and UOP are both businesses that generate orders in advance of sales. As such, don't be surprised if management starts reporting improved orders in 2021 and gives an optimistic outlook for 2022.
Safety and productivity solutions
Honeywell's strongest segment comprises safety solutions (36% of segment sales), warehouse automation (Intelligrated business, 32%), productivity solutions (18%), and sensing and Internet of Things (IoT) solutions (14%).
Adamczyk said the sensing and IoT business was coming back strong, while Intelligrated orders (driven by e-commerce warehousing) are so strong that Honeywell has all hands on deck trying to expand capacity to meet them. Meanwhile, recent results from its productivity solutions peer Zebra Technologies suggest the data capture market is very strong in 2021.
Looking ahead
All told, there's reason to be positive on all four of Honeywell's segments in 2021. As such, don't be surprised if the company further augments its reputation for under-promising and over-delivering. Watch this space.
