Honeywell International (HON -0.83%) will release its third-quarter earnings on Friday morning, and they promise to be a microcosm of everything going on in the industrial sector right now. On the one hand, end demand -- although variable across industries -- remains strong. But on the other hand, supply chain difficulties and rising raw material prices are increasing industrial companies' costs and impairing their ability to meet customer demand.

Here's what to look out for in the report.

Honeywell's mixed 2021

When looking at Honeywell, it's usually a good idea to drill down into its performance by segment and look at the trends in its full-year guidance. For ease of reference, in the table below, the cells in bold represent points at which when management improved its forecast.

The table reveals a story of generally improving end demand -- except for the key aerospace segment. In addition, management previously warned it would lose $100 million to $200 million of potential sales (around 0.4% of full-year sales) in the third quarter due to supply chain issues. It will be interesting to see if management adjusts that estimate on Friday.


Key End Markets

Revenue Guidance as of July

Revenue Guidance as of April

Revenue Guidance as of January


Commercial aerospace, defense, and space

Low-single-digit decline

"Trending toward low end of range"

Flat to low single-digit

Honeywell Building Technologies (HBT)

Non-residential buildings

Mid-single-digit growth

"Trending better than expected"

Low single-digit growth

Performance Materials and Technologies (PMT)

Oil & natural gas, petrochemicals, and specialty chemicals

Low-single-digit growth

"Trending toward low end of range"

Low single-digit growth or decline

Safety and Productivity Solutions (SPS)

Industrial productivity

Double-digit growth

"Trending better than expected"

Double-digit growth

Data source: Honeywell International presentations. Revenue guidance is for organic revenue.


Somewhat surprisingly, the reduction in organic sales growth guidance through the year primarily came down to "moderating U.S. defense spend, as well as by slower-than-expected international defense volumes." That appears to be a demand issue rather than a supply chain one, possibly related to the budgetary belt-tightening of governments dealing with the costs of the COVID-19 pandemic.

Airplanes in the sky.

Image source: Getty Images.

Honeywell's aerospace performance is likely to be mixed, with business aviation strong. According to Honeywell's recent global business aviation outlook "business aviation usage trends point to a nearly 50% increase in flight hours in 2021 versus 2020, roughly 5% above 2019 (pre-COVID)."

On the other hand, the weakness in defense spending and the impact of the Delta variant surge on international flight departures could cause Honeywell's aerospace segment to underperform relative to expectations. Still, the industry's recovery continues even if its pace varies.

Honeywell Building Technologies and Safety and Productivity Solutions

It's not a coincidence that the company's fastest-growing segments are also the ones that management called out as suffering supply chain constraints in the second quarter. Given the recovery in the economy, it's likely that both segments are seeing ongoing growth. In addition, the HBT segment has outperformed expectations in 2021.

The HBT unit also has a growth opportunity in selling its building systems and controls to customers looking to ensure healthy buildings in the post-pandemic environment. Longer term, HBT should be a notable beneficiary of the trend toward smart buildings

Commercial buildings.

Image source: Getty Images.

The SPS segment has been Honeywell's standout performer for over a year, and many of its growth trends are still in place. For example, its warehouse automation business, Intelligrated, continues to benefit from the surge in investment in e-commerce warehouses. In addition, demand for SPS' productivity solutions and services (scanners, barcode readers, and data capture) will grow as the economy reopens.

Finally, its sensing and Internet of Things (IoT) solutions have a long-term growth opportunity as the Industrial Internet of Things (IIoT) improves client efficiency. Through IIoT, business users can gather more and more data from Honeywell's sensors and mine it for actionable insights.

Honeywell segment organic growth.

Data source: Honeywell International presentations. YOY is year over year. 

All told, HBT and SPS have a common theme in the third quarter. Both will be subject to near-term pressures from supply chain constraints but have excellent long-term growth prospects.

Performance Materials and Technologies

The chart below shows that all three major PMT businesses had returned to growth as of the second quarter. Given the easy comparisons Honeywell will have with Q3 2020, it's reasonable to expect solid year-over-year growth this time too. Moreover, orders for catalysts and absorbents for fuel refiners (UOP) were up 30% in the second quarter, and the economic recovery has continued to contribute to rising fuel prices. The former will also benefit advanced materials, and the latter should encourage orders at Honeywell Process Solutions (process automation).

Honeywell PMT segment sales growth.

Data source: Honeywell International presentations. YOY is year over year.

Looking ahead

It won't be a surprise if Honeywell management raises its full-year revenue guidance. However, the critical question is: Will it be able to overcome cost increases to raise full-year margin and earnings guidance? Regardless, once the supply chain bottlenecks are resolved, Honeywell should be in a position to fully benefit from a robust demand environment across all four segments.